OREANDA-NEWS. Fitch Ratings has revised the Outlook on Sony Corporation (Sony) to Positive from Stable. The Long-Term Foreign- and Local- Currency Issuer Default Ratings (IDRs) have been affirmed at 'BB-'. A full list of rating actions is at the end of this release.

KEY RATING DRIVERS
Profile Improves after Restructuring: The Outlook revision reflects expected improvements in Sony's credit profile as a result of continued restructuring and our belief that the company is positioned to make operating profits. There is a high likelihood of a rating upgrade should the leverage remain at a lower level and earnings stabilise further in its key operating segments. However, we believe that Sony's profitability, excluding Sony Financial Holdings (SFH), will remain fragile due to its exposure to the weak consumer electronics segment.

Margin Improvement: Fitch believes that Sony's restructuring efforts are likely to improve profitability in the short term. Sony recorded positive EBIT margins in all major business segments, except the mobile business, in the financial year ended March 2015 (FYE15). The profitability was enhanced by a better product mix and lower overhead costs. Excluding goodwill impairments, PC business-related losses, profits from asset sales and insurance recoveries, operating EBIT, excluding Sony Financial Holdings, was JPY155bn in FYE15, compared with a loss of JPY3bn in FYE14.

Highly Competitive Consumer Electronics: Fitch believes that stiffer competition in the consumer electronics industry continues to be a key risk in Sony's margin recovery. The company cut back on its lower-end smartphones and pulled back from the mobile market in China. Sony also reduced its LCD TV shipment forecast and shifted its focus to high-end models. Despite Sony's efforts to revive its mobile and TV businesses, the presence of stronger rivals such as Samsung, Apple and LG pose significant challenges to Sony's goal of increasing profit.

Promising Image Sensor Market: The device segment (which includes image sensors) will be Sony's main growth driver and likely to improve overall profitability. Sony will benefit from the growing market for image sensors with advanced technology, which is being driven by upgrades in smartphone features. Sony is ramping up production capacity for these products, and a larger contribution from the higher margin image sensor business will improve the company's overall margin.

Fundraising for Expansion Capex: Sony has raised JPY302bn via share issues to fund incremental capex. Sony more than doubled its capex budget for FYE16 to JPY510bn (FYE15: JPY251bn), which will largely be invested in capacity expansion for the image sensor and camera module businesses. With the additional equity, Sony's financial profile should be more manageable within the current rating, even with the heightened capex. Non-financial FFO-adjusted leverage will remain lower at around 4x in the near future. (FYE15: 4.4X)

Adequate Liquidity: Fitch expects Sony's liquidity to remain adequate. At end-June 2015, Sony had an unrestricted cash of JPY628bn, compared with its debt due within one year of JPY136bn. The company also had unused credit facilities of JPY717bn at end-June 2015, indicating that the company continues to have good access to capital markets.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Revenue to decline by single digit percentage as structural reform in the consumer electronics businesses continues to affect Sony's top line.
- Non-financial EBIT margin to improve in FYE16 as the robust games and device segments are expected to sufficiently offset the weak mobile and TV businesses.
- Non-financial capex to increase to JPY501bn in FYE15 as per management guidance.
- Free cash flow to remain negative given elevated capex.
- Leverage to remain at around 4x.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to the rating Outlook being revised to Stable include (for Sony excluding SFH):
- EBIT margin sustained at lower than 1%
- FFO-adjusted leverage sustained at above 4.5x.

Positive: Future developments that may, individually or collectively, lead to positive rating action include (for Sony excluding SFH):
- EBIT margins sustained at more than 1%
- FFO-adjusted leverage sustained at below 4.5x

FULL LIST OF RATING ACTIONS
Long-Term Foreign- and Local- Currency IDRs affirmed at 'BB-'; Outlook revised to Positive from Stable
Short-Term Foreign- and Local- Currency IDRs affirmed at 'B'
Local-currency senior unsecured rating affirmed at 'BB-'