Friday, 21 September 2018

Down but not out

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It was a tough year for Sony, with yen currency movements exacerbating the affects of a global recession that left the consumer electronics firm particularly exposed. As some bankers pondered the chances of the collapse of this world famous brand, others argued the government would never allow the failure of a name synonymous with Japanese industry. The latter argument seems to have been the more convincing. Atanas Dinov reports.

The last 12 months have seen Sony funding itself primarily through the syndicated loan market. Raising over US$9.55bn equivalent via four deals – on top of outstanding debts of US$17.9bn equivalent – it boasts an approximate 0.4% share of overall global loan borrowing for the period, making it the 26th largest global loan borrower – and the largest from Japan.

Yet it was a very difficult year for Sony, rated A3/A-/BBB+/AA- by Moody’s/ S&P/ Fitch/ R&I, with negative outlook by all rating agencies. The group was shaken by volatility in the currency market, with the strong yen damaging its overseas income streams. Initially, currency moves had been beneficial, but as yen strength weakened overseas demand for its products, earnings were soon squeezed: the company derives around 75% of its revenue from abroad.

Sony’s loans activity was denominated by yen and US dollar transactions. In July, SMBC had helped Sony raise ¥150bn 3-1/4-year money – just a month after Moody’s raised the rating outlook to positive from stable. At that time Sony was still rated at A2. Even by mid August 2008, its 5-year CDS was still steady at 42bp.

SMBC arranged its largest deal of the year, a ¥475bn 4-1/4-year revolver, which closed at the end of November 2008. But by this time its fortunes were already painfully reversing, as the effects from Lehman Brothers’ collapse reached the Japanese economy in the last two months of 2008. Sony’s forecast of the expected record loss saw the cost of its protection balloon to over 130bp in early December.

In middle of the month Sony visited the Japanese domestic bond market in a deal managed by Nomura, Nikko Citi and Mitsubishi UFJ, but the deal failed to attract sufficient interest. It was believed the company sought to raise over ¥50bn, but it only managed to raise ¥37.5bn.

The deal comprised a ¥10.5bn 1.165% December 2011 note priced at JGBs plus 55bp (Libor plus 24.5bp); a ¥10.7bn 1.403% December 2013s at 60bp over (Libor plus 35.3bp); and a ¥16.3bn 2.004% December 2018s at 68bp over (Libor plus 67.4bp).

The deal left a bitter aftertaste, providing ample evidence that the domestic primary market was a long way from a recovery. Sony pressed on with its capital raising, at the end of December closing a US$1.5bn five-year loan facility arranged by Bank of Tokyo-Mitsubishi UFJ. Towards the end of January Sony’s CDS was quoted anywhere between 125bp to 180bp. As the end of the Fiscal 2008 approached it peaked close to the 200bp mark.

Fitch was the first to downgrade the borrower. In mid-March it lowered the issuer’s long-term rating to BBB+ from A-. But this did not stop Sony seeking new funds. At the end of March it completed a US$1.87bn three-year loan at Euribor plus 45bp via joint-bookrunners BNP Paribas, Citigroup and JP Morgan. The deal was designated to partly refinance a US$4.28bn five-year revolver that matured on March 26 2009.

The firm posted a loss of ¥98.9bn for the fiscal year 2008 (ended March 31 2009), its first fiscal year net loss in 14 years. This translated to an operating loss of ¥227.8bn. These figures eroded Sony’s income flows, putting downward pressure on its capital levels.

At around that time its CDS slightly eased from the January levels, though they remained high at around the 135bp area. Market participants said the CDS inaccurately reflected Sony’s health, with analysts dismissing the suggestion that Sony could go under, on the basis that the Japanese government would not allow it. Yet in May Moody’s followed Fitch, downgrading Sony one notch to A2.

Sony responded to its problems with an intensive reorganisation, which targeted a ¥300bn group-wide cost saving, while forecasting a second annual loss of ¥110bn for fiscal 2009.

Tokyo-based ECM bankers were speculating that Sony could be a candidate for an equity offering, as Sony was clearly in need of cash, but it ultimately rejected the equity idea, instead plumping for a bond deal. In June 2009, shortly after the period covered by this report, it issued a ¥220bn three-tranche bond that was a resounding success, comprising: a ¥60bn 0.945% June 2012 tranche priced at JGBs plus 41bp (Libor plus 12.5bp); a ¥110bn 1.298% June 2014 piece at JGBs plus 42bp (Libor plus 29.8bp); and a ¥50bn 2.068% June 2019 note priced at JGBs plus 55bp (Libor plus 60.8bp).

The deal –Sony’s largest ever bond issuance – was printed in a significantly improved market environment, and with its tighter spreads came in stark contrast to its December offering.

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