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Rating Action:

Moody's downgrades Nissan to Baa1; outlook negative

 The document has been translated in other languages

20 Feb 2020

Tokyo, February 20, 2020 -- Moody's Japan K.K. has downgraded the issuer and senior unsecured ratings of Nissan Motor Co., Ltd. to Baa1 from A3.

The outlook remains negative.

RATINGS RATIONALE

"The downgrade reflects Nissan's weak profitability as it attempts to turn around its US operations, its negative free cash flow, and the ongoing challenges in stabilizing its relationship with Renault S.A. (Ba1 stable) under the new management team," says Motoki Yanase, a Moody's Vice President and Senior Credit Officer.

The negative outlook reflects Moody's view that there is considerable uncertainty on whether Nissan can achieve its profitability targets. In May 2019, the company aimed to improve its consolidated operating margin to 6% by fiscal 2022 ending 31 March 2023 (proportionately incorporating its Chinese operations) from 3% it has estimated for fiscal 2019. However, the company may need to revise down this goal, reflecting the weak results and modest demand in key global markets.

The outlook also considers the continued uncertainty around the future structure of the Nissan-Renault alliance, and the two companies' ability to achieve planned synergies. Operational collaboration remains critical for the two companies as they face an increasing need for R&D and capital spending to support electrification and autonomous driving, requiring them to share resources.

Nissan's profitability remains weak as a result of challenges not only in its business model, but also megatrends affecting the global automotive sector. For the nine months to December 2019, Nissan recorded -1.9% of negative operating margin for automotive segment and, even considering some seasonal recovery in the fourth quarter, the segment will likely remain loss-making for fiscal 2019. Profit decline is largely driven by the weak US operations, where margins were pressured by high sales incentive costs on old car models while Nissan focused on the number of vehicles sold instead of margins. Nissan is renewing its older models in the US and adjusting down sales incentives, but the renewal of its sports utility and crossover vehicles that command higher prices and profitability will not be addressed until later in 2020.

Moody's expects that Nissan's cash flow will also remain weak due to operating losses and limited cash flow from operations from automotive segment. For the nine months to December 2019, the automotive segment's free cash flow was negative JPY670 billion before dividend payments. And despite seasonal recovery expected in the fourth quarter, its free cash flow will likely remain negative in fiscal 2019 and possibly through fiscal 2020. Nissan is reducing dividend payments to a quarter of what it initially planned for fiscal 2019. However, additional restructuring costs to downsize its global production facilities may also weigh on future cash flow. In the near-term, Nissan is exposed to the economic slowdown in China, where it sells almost 30% of its vehicles.

Moody's expects Nissan's balance sheet will remain solid, but not as robust as it has been over the past few years. Nissan can still maintain its automotive segment's liquidity as its lending to captive finance operations will decline along with lower sales in the US. However, Nissan cash in excess of external debt will decrease from the peak two years ago.

Moody's expects Nissan's leverage for its automotive segment will weaken to 1.0x-2.0x during the next 12-18 months from 0.5x-0.7x over the past few years. This is driven by a decline in EBITDA and some increase in adjusted total debt after applying our standard adjustments, including for operating lease and pension liabilities. Despite the expected deterioration, this level of leverage remains low and support the company's credit quality.

Moody's has also considered environmental, social and governance (ESG) issues in its assessment, which are material factors in Nissan's rating. The global automotive industry is undergoing unprecedented change in the face of tightening environmental regulation, changing technology and uncertain consumer preferences, against a flat-to-declining sales trajectory globally over the next several years. Requirements to reduce carbon emissions in core markets and the consequent need to invest more in alternative fuel technologies will continue to pressure Nissan's margin.

Governance concerns are also significant. Since the ouster of its former chairman Carlos Ghosn for alleged misconduct, uncertainties around Nissan's relationship with Renault have yet to be settled, posing a challenge to the new management team installed in December 2019. Combined with a complex cross-shareholder structure with Renault, Moody's believes these governance issues could hamper the company from effectively addressing its business challenges, including realizing more synergies from the alliance.

Moody's could further downgrade Nissan's rating if the company does not successfully turnaround its sales and margins, or if weak free cash flow leads to an increase in leverage. Specific metrics that could lead to a downgrade include (1) its EBITA margin remaining below 4.5%, (2) sustained negative free cash flow after dividend payments, and (3) debt/EBITDA rising above 2.0x. A downgrade is also possible in case of adverse developments in Nissan's corporate governance or relationship with Renault.

Given the negative outlook, an upgrade is unlikely in the near term. The outlook could be stabilized if Nissan demonstrates a clear path towards achieving an EBITA margin above 4.5%, and if it returns to positive free cash flow after dividend payments.

The principal methodology used in these ratings was Automobile Manufacturer Industry (Japanese) published in July 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Nissan Motor Co., Ltd., headquartered in Yokohama, is one of Japan's leading automobile manufacturers.

REGULATORY DISCLOSURES

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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

No Related Data.
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