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01 Dec 2010
Total amount of bonds rated is JPY250 billion
Tokyo, December 01, 2010 -- Moody's Japan K. K. has changed the outlook for the
Baa2 long-term debt ratings and the issuer rating of NEC Corporation
(NEC) to stable from negative. The change in outlook reflects Moody's
view that NEC's overall credit metrics will continue to improve,
given the company's strengthened capital structure, improved
business portfolio, and recovering profitability.
Moody's previously had concerns about the profitability of NEC's
former "electron devices" business. This segment,
mainly composed of semiconductor manufacturing, was driven by NEC's
listed subsidiary -- NEC Electronics Corporation (NEC Electronics,
not rated by Moody's).
NEC Electronics suffered a huge net loss in FYE 3/2009 and was a major
reason for NEC's overall net loss for the year, and which
led to the deterioration of NEC's financial profile at that time.
However, NEC had then taken necessary steps to improve its financial
leverage and business risks. In December 2009, NEC successfully
issued new shares and enhanced its equity by JPY118.5 billion.
According to the company's conservative financial policy,
the proceeds were partly used for debt repayment, and NEC's
adjusted total debt/total capitalization recovered to 62.9%
at end-September 2010 from 73.9% at end-March
To reduce overall business risks, NEC also restructured its business
portfolio. In April 2010, NEC de-consolidated NEC
Electronics and made the company an affiliate with a 34% equity
stake. NEC Electronics was concurrently integrated into Renesas
Technology Corp. (not rated by Moody's), and the newly
integrated company was placed in a good market position.
Moody's expects the integration to further strengthen the new company's
cost competitiveness and operational effectiveness. In the last
quarter of July-September, the newly integrated company recovered
an operating profit of JPY1.1 billion.
In another move, NEC integrated its mobile handset business with
Casio Hitachi Mobile Communications Co., Ltd. (not
rated by Moody's), and this will strengthen its competitiveness
by expanding its existing customer base and enhancing its cost structure.
Combined with NEC's overall cost reduction efforts, these
measures led to the increase in NEC's operating profit in the second
quarter of FYE 3/2011 to JPY24.3 billion from JPY 2.3 billion
a year earlier.
Moody's believes that the restructuring of NEC's business
portfolio has improved the stability of the company's overall profitability,
noting that all its business segments have recorded operating profits
in the same July-September quarter.
The current Baa2 rating incorporates gradual improvement in profitability
and leverage over the next few years -- such that adjusted debt/EBITDA
below 4.0x and adjusted debt/capitalization at around 60%.
Moody's Baa2 rating on NEC also reflects the company's stable
relationship with its main banks, in addition to its strong ability
to access the capital markets, as evidenced by the recent capital
issuance under a severe market environment. This provides a two-notch
uplift from its fundamental creditworthiness.
Upward rating pressure could emerge if NEC's overall profitability
is increased by further enhancing each segment's competitiveness,
evidenced by booked operating profit margin over 3.0%,
and/or adjusted debt/EBITDA well below 4.0x, both on a sustained
On the other hand, downward rating pressure could emerge if the
company's earnings weaken due to a significant decline in its market
position, evidenced by adjusted debt/EBITDA approaching 5.0x,
and/or adjusted debt/capitalization approaching 70%. Aggressive
use of financial leverage for acquisitions or any drastic changes in financial
policy would also put downward pressure on the rating.
The last rating action with respect to NEC was on May 19, 2009,
when the company's issuer rating and long-term debt ratings
were downgraded from Baa1 to Baa2 with a negative outlook.
The principal methodology used in rating this issuer was "Global Manufacturing
Industry," published on September 30, 2010. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on www.moodys.co.jp.
NEC Corporation, headquartered in Tokyo, is a leading integrated
electronics company in Japan. Its consolidated sales in FYE 3/2010
were JPY3.6 trillion. The main business segments of the
company are IT Services, Platform, Carrier Network,
Social Infrastructure, and Personal Solutions.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
Moody's changes NEC's rating outlook to stable
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
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