Life after smartphones is robot cars for Panasonic

Panasonic Corp.'s ratings upgrade shows that its investment in self-driving autos and car batteries has breathed new life into the company as it scales back on consumer electronics.

Japan's Rating & Investment Information Inc. raised its ranking on the company one level to A on Oct. 20, the assessor's first increase for the manufacturer. The price of Panasonic's bonds maturing in 2018 rose to a record high on Oct. 24.

President Kazuhiro Tsuga is pouring tens of billions of yen into its battery venture with Tesla Motors Inc. as the company develops new businesses while cutting back on TVs, smartphones and circuit boards. Panasonic forecasts its highest annual profit since fiscal 2007, coming back from losses just two years ago, and is due to report first-half results this week.

"When restructuring, you need to do it aggressively, because the more you do the quicker the recovery," said Mana Nakazora, the chief credit analyst for Japan at BNP Paribas SA. "Panasonic has done that and experienced a V-shaped rebound that has resulted in the ratings upgrade. The company is now in a really good shape."

Tsuga halted production of money-losing plasma TVs and stopped offering mobile handsets in Europe as part of his strategy of targeting businesses and reducing reliance on consumer goods. The company set up a manufacturing unit at Tesla's battery "gigafactory" in Nevada and is developing self-driving technologies including parking assistance.

Smart Cars

Panasonic is betting on increasing demand for optical lenses and sensors that allow cars to react to traffic situations without driver input, Laurent Abadie, who heads the Japanese manufacturer's operations in Europe, said in an interview last month. The technology, adapted from consumer cameras such as its Lumix series, will probably also find buyers in the airline industry, he said.

"With consumer products, a company's profit takes a hard hit when market prices fall, leaving it with potentially large losses on stock," said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch. "It is very hard to maintain a stable margin. But if you can get into the business- to-business area in the car industry, and have a deal, you sell a lot of volume at a set margin."

Profitable Again

In March, Panasonic reported its first full-year profit since 2011 and projected net income to jump 16 percent to 140 billion yen ($1.3 billion) for the current year. The company's most recent earnings results are due Oct. 31.

The manufacturer's probability of debt non-payment in the coming year has fallen to 0.11 percent from about 0.21 percent a year earlier, according to the Bloomberg default-risk model, which considers factors such as share performance and debt. Total debt dropped to 1.635 trillion yen from more than 2.1 trillion yen during the period, the data show.

The cost to insure Panasonic's bonds against non-payment was at 53.5 basis points on Oct. 24, down from a record 506 in November 2012. Rival Sony Corp.'s credit-default swaps were at 185, while the average for Japanese companies was 71, CMA data show. A basis point is 0.01 percentage point.

The yield premium over government debt on Panasonic's 1.081 percent bonds due 2018 fell to a record 13 basis points on Oct. 1, from a high of 345 two years earlier, according to Bloomberg- compiled data. Japan's benchmark 10-year notes yielded 0.47 percent, down 26 1/2 basis points this year. The yen traded at 107.96 against the dollar as of 3:43 p.m. in Tokyo.

Credit Ratings

R&I's sixth-highest rating for Panasonic compares with BBB+ from Standard & Poor's, or the eighth-highest level. Moody's Investors Service ranks it one step lower than S&P at Baa2, Bloomberg-compiled data show.

Panasonic's Tokyo-based spokeswoman Chieko Gyobu declined to comment on the ratings change and its impact on fundraising plans. The company, which has 520 billion yen in outstanding bonds, last offered debt in 2011.

"It became basically difficult to secure profitability against the headwind from the rise of companies in emerging countries" competing in consumer electronics, R&I said in a report on Oct. 20. "Although Panasonic does not have prominent earnings drivers, it has a variety of earnings sources and has achieved a solid and stable earnings base."