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Sony moves a step closer to junk; outlook "negative"

Vladimir Cole

Fitch Ratings (a company that assesses the risk level of debt) announced today that they have downgraded several types of Sony debt to "BBB+" (the debt is still three notches above the dreaded "junk" moniker, however). Fitch also slapped a "negative" outlook on the debt, indicating that future debt downgrades are possible as "Sony's financial profile [continues] to weaken in the next one to two years."

Reasons for the downgrade include:

  • Sony's "game segment will likely incur large losses over the next three to five years"
  • "Sony can no longer price its products at a material premium to its competition"
  • Delay of the PS3 in Europe
  • The big Sony battery recall
  • The "PS3 is likely to face more severe competition than [the PS2 did]"
  • "Sony has also been showing weaker financial results and credit metrics compared to its rivals in recent years"

Why does this downgrade matter? Lower-rated bonds make it more expensive for Sony to borrow money, increasing the cost for the company to finance operations. Higher borrowing costs also make it tougher for the company to drop prices on the expensive PS3 to a more palatable level in line with the Xbox 360 and Nintendo Wii. It's also, like, totally embarrassing to have your bonds downgraded.

We'll proffer the standard rebuttal, to save the SDF some typing: "OMG FITCH are such Xbots! GTFO! Fitch FTL!"

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