DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Senior Unsecured Debt rating of Nissan Motor Co., Ltd. (Nissan or the Company) as well as the Senior Unsecured Debt rating of its subsidiary, Nissan Canada Inc. (NCI), to BBB (high) from A (low). DBRS Morningstar also downgraded the Commercial Paper rating of NCI to R-2 (high) from R-1 (low) (the rating remains consistent with the current mapping relationship between DBRS Morningstar’s long-term debt and short-term debt rating scales). The trend on all ratings remains Negative. The ratings downgrade reflects the ongoing deterioration in Nissan’s operating performance that has exceeded DBRS Morningstar’s expectations and caused the Company’s financial risk assessment to migrate to levels no longer commensurate with the former ratings. Moreover, DBRS Morningstar deems the prospects of a recovery in Nissan’s earnings and credit metrics to recent historical levels as rather unlikely given ongoing industry headwinds in the form of lacklustre global sales trends amid increasing investment requirements. Finally, DBRS Morningstar notes that the current conditions in China, Nissan’s largest market, have deteriorated dramatically given the Coronavirus Disease (COVID-19) outbreak.
The Company’s persistent earnings decline continues to reflect ongoing issues in the key North American market, particularly the United States, where sales volumes have trended markedly lower relative to the national industry because of an aging product portfolio. (DBRS Morningstar acknowledges that Nissan has recently launched some notable new products, although these have been over-weighted in the lower-margin passenger car segments.) This has been exacerbated by deliberate volume reductions as the Company progressively decreases its exposure to the fleet sales channels that have undermined Nissan’s margins and pricing power. Across other markets, Nissan’s sales in Japan and Europe in the nine-month period ending December 31, 2019, also trailed their respective regional industries. While volumes in China through year-end 2019 were at solid levels, these are subject to sharp declines in the immediate term given the outbreak of the coronavirus.
The weaker earnings and negative free cash flow generation prompted the Company to cancel its year-end dividend for fiscal 2019 (ending March 31, 2020), although DBRS Morningstar notes that Nissan’s liquidity currently remains sound. Moreover, Nissan also indicated that it will update its midterm plan in May given market headwinds and the Company’s recent earnings trajectory.
Acknowledging the Negative trend, DBRS Morningstar does not anticipate Nissan’s ratings to be subject to positive rating actions in the near term, although a consequential improvement in the Company’s earnings could result in the trend being changed to Stable. However, DBRS Morningstar notes that various potential developments could result in a further revision of the ratings. These include a material change in the Company’s ownership composition and/or a meaningful unwinding of the Renault-Nissan-Mitsubishi Alliance. Finally, should the continued progression of the coronavirus result in an extended market disruption in China that develops further to additional regions, this could place negative rating pressure on not only Nissan but also several of its automotive peers rated by DBRS Morningstar.
All figures are in Japanese yen unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 2020), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrs.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: <a href="https://www.dbrsmorningstar.com/research/357883/" target="_blank">DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19)</a>.
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