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19 May 2009
JPY770 billion of debt facilities affected
Tokyo, May 19, 2009 -- Moody's Investors Service has today downgraded the issuer rating and long-term
debt ratings of NEC Corporation (NEC) to Baa2 from Baa1. At the
same time, Moody's has confirmed NEC's Prime-2 short-term
ratings. The rating action concludes the rating review initiated
on February 3, 2009. The rating outlook is negative.
The rating action was prompted by NEC's impaired profitability,
as well as its increased level of financial leverage, and reflects
Moody's concern that rebuilding the company's financial structure will
prove a lengthy process, in light of challenging market conditions.
The negative rating outlook indicates Moody's uncertainty over whether
NEC will be able to implement its business strategy in a timely and effective
way in an unpredictable operating environment.
Moody's notes that NEC recorded an operating loss of JPY6.2 billion
and a net loss of JPY296.6 billion in FYE3/2009. The large
net loss -- compared to the operating loss --
was caused mainly by a loss stemming from the valuation of investment
expenses, and business restructuring expenses, impairment
losses, as well as other factors.
For FYE3/2010, NEC is projecting operating profit of JPY100 billion
and a net profit of JPY10 billion. According to the company's plan,
the recovery in profitability will be achieved by reducing fixed costs
by JPY270 billion and boosting its earnings structure reform.
Moody's believes that NEC's cost reductions and business restructuring
will support the moves designed to regain the competitiveness of its business
portfolio, despite the adverse business environment.
The rating agency also notes that NEC Electronics Corporation (NEC Electronics,
not rated by Moody's), a semiconductor business subsidiary,
has started negotiations to integrate its operations with Renesas Technology
Corp. (not rated by Moody's). Due to the rapid declines
in demand and product prices, NEC Electronics' operating loss in
FYE3/2009 was a major reason for NEC's overall operating loss for the
Moody's expects that the planned integration of the two semiconductor
companies may strengthen the new company's cost competitiveness,
operational effectiveness, and market position. The integration
may also eventually help improve the competitive environment on semiconductor
markets. These favorable effects of integration are, if realized,
likely to stabilize NEC's business risks.
Nevertheless, Moody's is concerned that, given the uncertain
business environment, NEC still faces challenges in expeditiously
improving the competitiveness and profitability of its semiconductor business
through the planned integration.
On the other hand, stable profits from NEC's IT/network solution
business -- a segment with a strong market position and
competitiveness -- will help stabilize overall profitability.
This business recorded operating profit of JPY124.9 billion in
FYE3/2009, and the company projects that the segment's operating
profit will amount to JPY125 billion in FYE3/2010.
NEC's balance sheet was damaged by the significant net loss and the devaluation
of its assets in FYE3/2009. Its adjusted total debt to total capitalization
ratio has been significantly impaired, to about 74% at end-March
2009 from 57% a year earlier. However, Moody's believes
that NEC can maintain reasonable financial flexibility, given its
close, stable relationships with financial institutions.
NEC's ratings will face further downward pressure if there is further
weakening in its financial metrics and cash flow coverage. An adjusted
total debt to total capitalization ratio over 75% and a debt/EBITDA
ratio over 5.0x for two years could be a possible trigger for further
The last rating action for NEC was implemented on February 3, 2009,
when the company's Baa1 long-term debt ratings were placed on review
for possible downgrade. NEC's Prime-2 short-term
rating was also placed on review for possible downgrade at that time.
The principal methodology used in rating NEC was "Global Manufacturing
Industry" (December 2007), which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found in the Credit Policy & Methodologies directory.
NEC Corporation, headquartered in Tokyo, is a leading integrated
electronics company in Japan.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's downgrades NEC to Baa2; outlook negative
Senior Vice President - Team Leader
Corporate Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
No Related Data.
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