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Citing competition that is more intense, an earnings recovery that is slower than expected and profitability that will not improve without more restructuring, Standard & Poor’s on Friday morning cut the long-term corporate credit rating for Sony Corp. (NYSE: SNE) from BBB to BBB-, just one notch above junk. The outlook on Sony’s long-term credit rating is negative. The ratings agency also lowered its rating on the company’s short-term debt from A-3 to A-2.

S&P said that it sees only a moderate recovery in Sony’s earnings and profitability due to more intense competition in the smartphone, gaming and digital imaging businesses, areas that are strategically important to Sony. The ratings agency also expects further downside risks to Sony as a result of the intense competition.

Sony has taken steps to become more competitive, reducing costs, restructuring its business and releasing new products like its very successful PlayStation 4. The issue is that the turnaround is taking longer than S&P expected. The ratings agency expects EBITDA margin for fiscal year 2013 ending in March to be 4.8% and to rise only to 5% in 2014 and beyond. Here is the salient point from the ratings notice:

Weak profitability and higher volatility in profitability are the largest constraints on the business risk profile, in our view.

S&P expects Sony’s debt levels to remain high, but the agency expects an improvement of Sony’s debt-to-EBITDA from its current 4.3 times to the mid-3-times range in the current fiscal year, with only modest improvement after that.