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2 Comments
- MouseCircus, on 10/12/2007, -0/+1I have nothing to provide to the discussion, but there is a very interesting comment on Joystiq.
Via Joystiq, comment #19 by LaughingTarget:
"It doesn't matter if they own Sony stock or bond, though I feel sorry for anyone that does own Sony stock, their cut of the assets comes from the intangible goodwill and patents stuff, meaning anyone with Sony stock is technically worthless given the level of debt in the company.
This means a LOT to people. As stated, Sony's astronomically high debt will make it harder and harder to secure new sources of income. Japanese companies are traditionally debt driven, and this is what caused the recession in Japan during the 90's. For comparison, US companies were getting away from debt financing during the same period and our economy exploded. Take rival Microsoft for example, their entire real debt (not the unearned income account) amounts to a whopping $81 million. Bill can pay off Microsoft's entire debt account from his own wallet and never notice the difference. Japan is starting to pick up equity financing, but Sony is far too slow on the uptake.
Sony's entire operations are funded on debt, and the most dangerous kind, short term. Every year, they have to refinance a major chunk of their short term debt at higher rates, and every year, they keep adding more onto that pile.
http://finance.google.com/finance?fstype=ci&cid=33095
Go there, click annual data, and take a look at two parts. Look under Financing Cash Flow Items and Issuance of Debt.
Before I explain what each of those two mean, it is important to mention that the Cash Flow statements are not rolling accounts. This means that the items you see in each given year are not the totals, but the additions of all the previous years combined. Black is cash inflow, red is cash outflow.
Financing Cash Flow Items is short term debt. These are notes and loans taken from banks and other sources that need to be paid off within the current fiscal year. Right now, Sony has $26.762 billion that needs to be paid off on or before March 1, 2007. For reference, Sony had a banner year last year and only pulled in a $1 billion profit. This means that Sony is going to, yet again, have to refinance the whole banana at higher rates and take out even MORE loans to cover the expenses and interest costs.
Issuance of Debt - These are long term bonds that Sony has to pay out an interest payment twice a year on. These, by themselves, aren't as bad as the short term loans and notes, but are what could bring Sony down if the short term debt is not brought under control. Bonds have restrictive covenants on them. A covenant states that the issuing company, Sony in this case, has to maintain certain levels of debt and bond ratings. If the company fails to maintain those levels, then the entire bond issuance is callable by bond holders at a pre-set premium (higher than the face value), meaning Sony has to pay off all bond holders immediately and without argument, something Sony is in no position to do without significant liquidation of fixed assets (such as the Playstation division, which Microsoft would gladly take off Sony's hands).
What does this mean to gamers? As Sony continues to pile on the debt, they become less and less able to loss lead their products. This means that Sony will either hold the PS3 at $600 for a very long time (well beyond December 2007) or, if their debt becomes bad enough, will have to raise the price of the PS3 to avoid breaching covenants on their bonds. Getting downgraded only makes it harder to get debt under control. As a company's credit rating drops, their borrowing rates increase significantly. A AAA bond rating averages around .54% yearly interest, while a BBB+ rating, Sony's level, averages around 27% (last time I checked). This means that had Sony has to pay 27% yearly interest on any new bond issuances (higher if investors think Sony is going to backslide even more), leaving even less leeway to drop prices on anything.
Don't be surprised that by this time next year, the PS3 is still $600 and stand-alone BluRay devices go for $200 and the 360 premium is selling for $300. Sony's overly ambitious and fiscally irresponsible PS3 project may ultimately destroy their entire division. $600 is sustainable this year, but not next year, and all indicators show that Sony is in no position to drop any prices and will need to reach a point where they are selling every PS3 for a profit to avoid imploding."
I don't know the stock market very well, but this is the impression I had been given by my parents(who are moderately involved with the stock market) and from various sources online. It seems accurate, and it really puts Sony's financial trouble into perspective. - surf314, on 10/12/2007, -1/+2inaccurate title, article has to do with debt not stock. It's a lot different and in some ways completely opposite than stock. Owners of debt want the company safe as possible so they get their payments exactly as per the agreement, they could care less about returns as long as the company has enough to make payments. Owners of stock don't mind risk as long as the return is appropriate to the risk. Companies face a tug of war between the two.
Basically this says nothing exept that sony is taking on a lot more risk, which bond holders hate. It doesn't mean they are going to fail, they could make a s*** ton of money for that risk. Risk is sometimes good.
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