OREANDA-NEWS. February 16, 2015.Fitch Ratings has affirmed Panasonic Corporation's (Panasonic) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'BBB-'. The Outlook has been revised to Positive from Stable. A full list of rating actions is at the end of this release.

The Outlook revision reflects Fitch's expectations that Panasonic's streamlined business structure and coherent strategy would further strengthen its profitability and cash generation over the medium term. The company's restructuring efforts have supported the profitability of core businesses and trimmed losses in struggling businesses.

KEY RATING DRIVERS

Macro Threats: We believe Panasonic's momentum in improving profitability and cash flow generation would be challenged by slower economic growth in China, weaker housing-related demand in Japan and lower gasoline prices. Slow sales in China and Japan affected Panasonic's 3QFYE15 (financial year ending March 2015) results, although the negative impact was offset by favourable foreign exchange and the benefits of streamlined operations. The recent sharp drop in gasoline prices may also reduce the appeal of plug-in vehicles, affecting the demand for the company's lithium-ion batteries.

Capex to Rise: We expect Panasonic's capex to increase in the next four to five years, driven mainly by investments in Tesla Motors, Inc.'s Gigafactory. Any further weakness in the Japanese yen will increase the cost of this investment. While revenue from the lithium-ion battery business will lag behind investment requirements initially, Panasonic's existing business can generate strong enough operating cash flow to support rising capex requirements.

Acquisition Risk: We believe that Panasonic would be more focussed on acquisitions in the next two to three years. Panasonic is shifting its focus from restructuring to the next stage of growth, which may include strategic investments and collaborations to expand its white goods business in Asia, to gain access to new sales channels overseas for its eco solutions products and to form alliances in automotive operations.

Conservative Capital Structure: Excluding significant debt-funded M&A, we expect funds flow from operations (FFO)-adjusted leverage to stay at around 2x or below in the next two to three years. Panasonic has a conservative capital structure that compares favourably with its peers at its rating level. The company turned net-cash positive in September 2014 and net cash further increased to JPY245bn at end-December 2014. LTM total debt/EBITDA dropped to 0.9x at end-December 2014, from 1.9x in FYE14.

Strong Liquidity: Fitch expects Panasonic's liquidity to remain strong. At end-December 2014, Panasonic's unrestricted cash of JPY824bn comfortably covered its debt due within one year of JPY64bn. In addition, the company announced its plan to raise up to JPY400bn of senior notes. Part of the proceeds will be used to refinance existing debt due in FYE16. We expect Panasonic to continue to generate positive free cash flow (FCF).

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Generally steady profitability and cash generation, despite higher pressure from macro-economic pressures
- Capex to increase, but capex-to-sales to stay at 4% or below in the next two to three years
- Increased strategic investments and M&A in the next three years
- FCF to remain positive in the next two to three years, but higher capex to reduce FCF margin to 1.5%-2% from 4.6% in FYE14

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to stabilisation of Outlook include:
- Sustained operating EBIT margins below 4.5% (FYE14: 3.9%)
- FFO-adjusted leverage sustained above 2.25x (FYE14: 1.9x)

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Sustained operating EBIT margin above 4.5%
- FFO-adjusted leverage is sustained below 2.25x

LIST OF RATING ACTIONS

Long-Term Foreign- and Local-Currency IDRs affirmed at 'BBB-'; Outlook revised to Positive from Stable
Local-currency senior unsecured rating affirmed at 'BBB-'
Short-Term Foreign- and Local-Currency IDRs affirmed at 'F3'