Bloomberg News

Sony Default Swaps Reach 4-Month High to Samsung: Japan Credit

November 02, 2011

Nov. 2 (Bloomberg) -- The cost to insure debt of Sony Corp. against losses reached a four-month high relative to rival Samsung Electronics Co. as the stronger yen and flooding of factories in Thailand weigh on earnings of Japanese exporters.

The difference for five-year credit-default swaps widened to 22.5 basis points on Oct. 25, the most since June 27, according to CMA prices. While contracts for Sony, the maker of Walkman music players and Vaio personal computers, declined 25 basis points to 121 last month, Samsung dropped 65 to 99 and an index of 66 global technology companies fell 35 to 212.

Like many Japanese exporters, Sony relies on factories in Thailand to cut manufacturing costs. Sony, Canon Inc., Nikon Corp. and Toyota Motor Corp. plants in the country have been hit by the worst floods in 50 years. The company is also facing weaker demand for its Bravia televisions and a yen trading at a postwar high, prompting Moody’s Investors Service to cut Sony’s credit-rating outlook last month.

“Sony is just one example of Japanese electronics makers losing their edge against the South Korean and Taiwanese rivals,” Yasuaki Kudamatsu, a credit analyst at Mitsubishi UFJ Morgan Stanley Securities Co., said in a telephone interview yesterday. “The yen is also weighing on the company’s competitiveness.”

Yield Premium

Tokyo-based Sony has 1.46 trillion yen ($18.7 billion) of loans and bonds due by June 2019, compared with Suwon, South Korea-based Samsung’s 116.8 trillion won ($104 million) in outstanding debt, according to Bloomberg data.

The extra yield investors demand to buy Sony’s 2.068 percent bonds maturing in June 2019 fell yesterday to 26.7 basis points more than Japanese government debt, Bloomberg data show. There was no available pricing data on Samsung’s 7.7 percent notes due in October 2027, the company’s only outstanding bonds.

Keita Sanekata, a spokesman for Sony, declined to comment on the company’s profit and fundamentals. The world’s third- largest maker of TVs is set to release its second-quarter earnings today, while Samsung reported earnings Oct. 28.

Sony’s sales of Bravia TVs weakened after consumer sentiment in Europe and the U.S. declined “significantly,” Moody’s said on Oct. 18. The yen’s appreciation against the euro will make it difficult for Sony to restore its TV business and end a seven-year 476 billion yen loss, the ratings firm said.

Credit Rating

Moody’s retained Sony’s A3 ranking. That compares with A1 rating with a stable outlook on Samsung, the world’s biggest maker of TVs, and Baa2 with a “negative” outlook for LG Electronics Inc., the second largest.

Elsewhere in Japan’s credit markets, Nabtesco Corp. registered to sell as much as 30 billion yen of bonds, according to a filing yesterday with Japan’s finance ministry. The Promotion and Mutual Aid Corporation for Private Schools of Japan hired Mizuho Financial Group Inc. and Mitsubishi UFJ Morgan Stanley Securities Co. for a 5 billion yen bond sale planned for this month, Mizuho said in a faxed statement.

The yield on Japan’s benchmark 10-year bond fell 2 basis points, or 0.02 percentage point, to 1 percent as of 10:45 a.m. in Tokyo. The extra yield that 10-year U.S. Treasuries pay over similar-maturity Japanese debt rose to 102 basis points. The gap has ranged this year from a high of 231 in February to a low of 73 last month.

Five-year credit-default swaps for Japan’s sovereign debt climbed to 115 basis points yesterday from this year’s high of 155 on Oct. 4, CMA prices in New York showed. CMA is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Credit Risk Rises

The Markit iTraxx Japan index of credit-default swaps for 50 companies rose 13.5 basis points to 190 as of 9:13 a.m. in Tokyo, Deutsche Bank prices show, down from this year’s high of 233.42 on Oct. 5.

Sony, Japan’s largest exporter of consumer electronics, said last month it is delaying release of some camera and headphone models because of Thai disruptions. The company is considering securing an alternative production base for cameras after flooding partially damaged a plant that makes almost all of its high-end models including Alpha and NEX, Satsuki Shinnaka, a spokeswoman, said on Oct. 21.

“Japanese exporters are struggling to differentiate their products and resist commodification,” while stronger yen further erodes their competitiveness, Kudamatsu said.

‘Temporary Boost’

Samsung said on Oct. 25 the floods will help boost demand for flash-memory drives, because of disruptions in production of hard-disk drives used in personal computers. Flash memory chips, smaller, faster and more shock resistant than hard disk drives, are used to store data in consumer electronics such as digital cameras, mobile phones and portable music players.

“The Thai situation is going to give Samsung a temporary boost,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “The negative news impacting Sony are not just due to the floods, there is uncertainty over the overall economic environment.”

The stronger yen, the March 11 earthquake, hacking of the company’s video game network and Thai floods have reduced Sony’s market value by an equivalent of $17 billion this year, while Samsung gained $5.4 billion, Bloomberg data show.

The yen has advanced against all of its 16 major counterparts since April 1, rising 12 percent against South Korea’s won, as a slowdown in the U.S. economy and Europe’s debt crisis boosted demand for the Japanese currency as a refuge protected by the nation’s current-account surplus.

Yen Forecast

The Japanese government’s intervention in the currency markets on Oct. 31, estimated by Credit Suisse Group AG to exceed $50 billion, prompted the yen to weaken the most since 2008. The yen traded at 78.19 against the dollar as of 10:49 a.m. in Tokyo, after strengthening to as much as 75.35 on Oct. 31.

Sony expects the yen to average about 80 per dollar and 115 versus the euro for the year ending March 2012, the company said in July. A stronger yen hurts Japan’s exporters because it reduces the value of their overseas income.

The company estimates it loses about 6 billion yen in annual operating profit, or revenue minus the cost of goods sold and administrative expenses, for every yen gain against the euro, Sanekata said. Fluctuations in the dollar-yen rate won’t affect the company because it enhances overseas production by using a supply chain abroad, he said.

--Editors: Pavel Alpeyev, Beth Thomas

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Satoshi Kawano in Tokyo at skawano1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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