Tokyo, February 26, 2020 -- Moody's Japan K.K. has downgraded NIPPON STEEL CORPORATION's
(NSC) senior unsecured debt rating to Baa2 from Baa1, its domestic
shelf registration rating to (P)Baa2 from (P)Baa1, and its domestic
subordinated loan rating to Ba1 from Baa3.
The rating outlook remains negative.
RATINGS RATIONALE
"The downgrade considers the continued erosion of NSC's profits,
amid declining domestic demand from major consumer industries such as
auto parts, shipbuilding and construction machineries, as
well as the weak pricing environment in the Asian steel market,"
says Motoki Yanase, a Moody's Vice President and Senior Credit
Officer.
"The continued negative outlook reflects the challenges NSC faces
in turning around its operations amid its ongoing rationalization efforts
and the need to upgrade several domestic production facilities,"
adds Yanase.
NSC on 7 February announced its results for the third quarter of the fiscal
year ending March 2020 (fiscal 2019), forecasting a JPY310 billion
loss for the full fiscal year compared to an earlier forecast of a JPY100
billion business profit (operating profit excluding extraordinary items).
The large revision was driven by JPY490 billion in impairment and other
losses, but even excluding these items the company's profits
remain weak at JPY54 billion, representing a 0.9%
margin.
Moody's expects the company's weak profitability will raise
its leverage around 5.5x for fiscal 2019, with the current
weak operating environment likely to keep leverage elevated for some time.
Even after incorporating the profit contribution from equity-method
subsidiaries including Essar Steel in India (now known as AM/NS India)
and AM/NS Calvert in the US, Moody's expects leverage will
stay above 4.5x for the next 12-18 months, which is
on the upper end of Moody's expectations for the company's
Baa1 rating.
The limited prospect for a near-term recovery in demand has prompted
NSC to retire 5 million tons (about 10%) of its production capacity
in Japan over the course of next several years, which will be reflected
in the large impairment losses. Together with the previously announced
retirements, NSC will reduce the number of blast furnaces to 11
from 15 by the end of 2022. The announced impairment and other
losses are mostly non-cash and one-off, but will weaken
the company's equity cushion and capitalization ratios. Specifically,
Moody's expects NSC's total debt/capitalization ratio will
deteriorate to over 45% for fiscal 2019 from 38%-39%
during the past three years, and remain at that level over the next
12-18 months absent a meaningful recovery in demand and the pricing
environment.
While NSC's planned rationalization of production capacity will
increase utilization at its remaining facilities and help improve its
future asset efficiency, it will take time to demonstrate these
benefits. Moody's expects NSC's EBIT/tangible assets
will remain in the low-single digits in percentage terms,
similar to its EBIT margin, for the next 12-18 months.
In addition, NSC also needs to renovate some of its older facilities,
which will require a high level of capital spending for the next 2-3
years. This will suppress free cash flow generation and add to
the challenge of managing total debt.
Although its leading industry position and strong relationships with customers,
in particular Japanese automakers, will help secure demand,
it will take some time for NSC to increase production efficiency and lower
its cost base to improve fundamental profitability.
NSC faces further operational challenges associated with integrating its
JPY770 billion acquisition of Essar Steel in India, which NSC acquired
in a joint venture with ArcelorMittal (Baa3 negative) in December 2019.
In terms of environmental, social and governance (ESG) factors,
the rating incorporates the pressure faced by the steel industry as a
whole to reduce green gas emissions. The sector faces high environmental
risks and costs to reduce emissions, although investments NSC has
made should lower that risk compared to the peers. In addition,
steelmakers could face changing demand from the auto sector as it transforms
itself, and if carmakers experience lower demand for some of their
products, or substitute steel with lighter-weight materials.
The outlook could return to stable if NSC's operating environment
improves and its key credit metrics improve, while it also makes
progress in its business rationalization efforts. Specifically,
the outlook could return to stable if debt/EBITDA remains below 5.5x
on a sustained basis.
The rating could be downgraded if NSC's profits weaken further,
or if M&A or shareholder return activities push its leverage higher,
such that debt/EBITDA exceeds 5.5x on a sustained basis.
The principal methodology used in these ratings was Steel Industry (Japanese)
published in October 2017. 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 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.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
