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.
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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
