S&P Global Ratings on May 20 affirmed Japanese electronics and entertainment company Sony Corp.'s A- long-term issuer credit and senior unsecured ratings and A-2 short-term issuer credit rating, with a stable outlook.

The rating agency also affirmed Sony Global Treasury Services PLC's A- long-term issuer credit rating, with a stable outlook.

Moreover, Ratings affirmed the A-2 short-term issuer credit rating on Sony Global Treasury Services and commercial paper program ratings on Sony Global Treasury Services and another subsidiary, Sony Capital Corp.

The agency said the rating actions are based on its belief that the company will manage to tolerate the expected decline in its key financial ratios as a result of its plan to take full ownership of its listed financial subsidiary Sony Financial Holdings Inc. for ¥395.5 billion.

They also reflect the agency's view that fully incorporating the higher credit quality of Sony Financial Holdings into Sony's creditworthiness will mitigate a deterioration in Sony's finances.

Sony can maintain relatively stable EBITDA and profitability, Ratings said, because of the companywide effort to expand business categories that generate recurring revenue, such as gaming network and music streaming businesses.

Ratings expects the pandemic to have a small impact on the company's game and music businesses compared to the potential squeeze on its sales of image sensors, TVs, cameras and entertainment income from its movie business.

The rating agency projects the company's nonfinancial businesses will likely have an EBITDA margin of at least 13% to 14% in fiscal 2020, down from 15% in fiscal 2019.

Meanwhile, Ratings expects the pandemic and the takeover to worsen Sony's ratio of debt to EBITDA to about 0.7x as of March 31, 2021, from about 0.3x in 2020. It considers the large tender offer at a time of weakening business conditions as a negative factor in its assessment of Sony's financial discipline. Ratings said it expects Sony to make further large acquisitions in the coming one to two years.

According to the rating agency, the stable outlook reflects its view that Sony's profitability and key financial ratios will stay at levels in line with the rating even after the takeover is completed as planned.

Ratings said it could downgrade Sony's ratings if there is a higher likelihood that its EBITDA margin will decline and stay below 13%, which could be a result of a global economic downturn; if the company's ratio of debt to EBITDA worsens and stays above 1x owing to further large acquisitions or generous shareholder returns; or if the stand-alone credit quality of Sony Financial Holdings worsens substantially because of a deteriorated capital base.

Conversely, it could upgrade Sony's ratings if the company's main businesses become more competitive and subsequently improve its EBITDA margin to near 16%; or if it maintains positive discretionary cash flow sustainably, which would allow its nonfinancial businesses to achieve and maintain a net debt-free position.

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As of May 20, US$1 was equivalent to ¥107.37.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.