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Rating Action:

Moody's changes NIPPON STEEL's outlook to stable from negative; affirms Baa2

 The document has been translated in other languages

22 Apr 2021

Tokyo, April 22, 2021 -- Moody's Japan K.K. has affirmed NIPPON STEEL CORPORATION's (NSC) Baa2 senior unsecured debt rating, (P)Baa2 domestic shelf registration rating, and Ba1 domestic subordinated loan rating.

The outlook has been changed to stable from negative.

"The change in outlook is driven by the steady recovery of steel demand and surging steel prices, as reflected in NSC's profits for the third quarter of fiscal year ending March 2021 (fiscal 2020), which we expect will continue," says Motoki Yanase, a Moody's Vice President and Senior Credit Officer.

"We expect steel demand to continue to normalize over the next 12-18 months as Japan and other global markets come out of the negative influence of the pandemic, which in turn will improve NSC's financial performance," adds Yanase.

RATINGS RATIONALE

NSC's profit improvement for the second half of fiscal 2020 was supported by (1) a robust recovery in steel demand, led by normalized operations within the automotive industry and other industries of which production was affected by the pandemic, and (2) high spot steel prices, which have been surging since late 2020 and hit record highs in March 2021, at more than 50% above historical averages. For the third quarter, NSC reported JPY73 billion of recurring profit, a significant improvement from JPY79 billion in losses in the second quarter. The company estimates to generate JPY63 billion of recurring profit in the fourth quarter, exceeding pre-pandemic levels in fiscal 2019.

Moody's expects that steel demand for the next 12-18 months will be supported by the continuing recovery in automakers and other manufacturers' productivity. Despite the commodity price hike, mainly for iron ore, Moody's expects that NSC will be able to pass on the cost hike to contracted end-prices and secure adequate steel spreads, supported by the demand recovery.

NSC will also benefit from cost savings related to lower fixed costs as it shuts down domestic production facilities in mature markets with limited demand growth. Specifically, NSC plans to shut down five blast furnaces in Japan and reduce 20% of its crude steel production capacity by the end of fiscal 2024. This restructuring plan will allow NSC to improve its annual profits by approximately JPY150 billion, the majority of which Moody's expects will be realized within the next 2-3 years.

As a result, Moody's estimates NSC's EBIT margin will improve to around 3%-4% during the next 12-18 months from 0.2% for the twelve months ended December 2020.

Improving profit will help NSC lower its leverage while it continues with its planned investments to increase value-added products. With JPY2.4 trillion budgeted for the five years to fiscal 2025, the company's capital spending could be higher than its historical averages. However, Moody's expects that a lower cost base as NSC rationalizes its production facilities will help the company generate sufficient profit and cash flow and thus improve its leverage over the next several years.

NSC also earmarked JPY600 billion of investments to expand its foothold in Asia Pacific, but Moody's expects the company to adjust its spending while managing its debt and leverage improvements and as such, NSC's leverage, as measured by debt/EBITDA, will decline towards 5.5x over the next 12-18 months from 9.0x in December 2020, and further improve to below 5.0x by fiscal 2023.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's view that an improvement in the operating environment and the company's restructuring efforts will support NSC's financial performance.

The rating could be upgraded if NSC (1) improves its profitability by completing production rationalizations and realizing cost cuts as planned, and (2) reduces its debt materially such that its EBIT margin remains above 6% and debt/EBITDA stays below 3.5x for a sustained period.

The rating could be downgraded if (1) the company's profitability remains weak due to declining domestic demand, (2) business risks increase from its expansion into Asian countries, or (3) acquisitions and shareholder returns materially increase its debt such that debt/EBITDA remains above 5.0x.

The principal methodology used in these ratings was Steel Industry (Japanese) published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1096464. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Tokyo, NIPPON STEEL CORPORATION is a global integrated steelmaker.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Motoki Yanase
VP - Senior Credit Officer
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

No Related Data.
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