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Rating Action:

Moody's downgrades NIPPON STEEL CORPORATION to Baa2; outlook negative

 The document has been translated in other languages

26 Feb 2020

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

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