DBRS Morningstar Downgrades Nissan Motor Co., Ltd. to BBB (low), Negative; Removes Ratings from Under Review with Negative Implications

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., to BBB (low) from BBB (high). All trends are Negative. The rating downgrades reflect the ongoing deterioration in Nissan’s operating performance that has been considerably exacerbated by the global outbreak of the Coronavirus Disease (COVID-19). Pursuant to the moderate scenario as outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (dated April 22, 2020, and subsequently updated on June 1, 2020, and July 22, 2020) and taking further into account the Company’s publicly disclosed outlook for the fiscal year ending March 31, 2021 (F2020), DBRS Morningstar estimates that Nissan’s financial risk assessment (FRA) will decline to levels markedly weaker relative to the former ratings. With these rating actions, Nissan’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar notes that prior to the coronavirus outbreak, the Company’s FRA was trending significantly downward, notably reflecting ongoing challenges in the key North American market where sales volumes meaningfully contracted because of an aging product portfolio. (DBRS Morningstar acknowledges that Nissan has recently launched some notable new products, although these initially were somewhat over-weighted in the lower-margin passenger car segments.) The contraction in sales was exacerbated by deliberate regional volume reductions as the Company continues to lessen its exposure to the fleet sales channels that have undermined Nissan’s margins and pricing power. Moreover, Nissan’s global sales have persisted at significantly lower levels relative to its worldwide production capacity, prompting the Company to forego prior growth objectives and target a 20% reduction in aggregate production while also streamlining its product portfolio down to core models. DBRS Morningstar notes that the above-cited challenges resulted in consecutive rating downgrades of the Company, initially in September 2019 and subsequently in early March 2020.

In addition to the above, consistent with other automotive manufacturers, the coronavirus pandemic adversely affected the Company’s operations globally, initially in China in January 2020 and subsequently across Japan, North America, and Europe, as well as several other smaller jurisdictions. In line with the trajectory of the pandemic, Nissan’s Q1 F2020 financial results were correspondingly weaker (compared with the similar prior-year period), as the Company’s industrial operations reported revenues of JPY 910.3 billion (compared with revenues of JPY 2.074 trillion in Q1 F2019) and an operating loss of JPY 217 billion. Concurrent with the release of its Q1 F2020 results, Nissan also announced its outlook for F2020 with the Company projecting annual consolidated revenues to decline by 21% (compared with F2019) to JPY 7.8 trillion, with Nissan’s industrial operations estimated to incur an operating loss of approximately JPY 580 billion (roughly equivalent to USD 5.4 billion). In line with the above, while DBRS Morningstar estimates the Company’s industrial balance sheet (i.e., its debt-to-capitalization ratio) to remain sound, DBRS Morningstar also projects earnings- and cash flow-based credit metrics to decline to very weak levels in F2020 and assumes only a moderate recovery the following fiscal year.

DBRS Morningstar notes that Nissan has taken a number of meaningful and proactive measures to bolster its cash and liquidity position in response to the coronavirus pandemic. These include the suspension of dividends (that in recent years averaged approximately JPY 180 billion annually), capital market issuance of JPY 70 billion, and the attainment of JPY 895 billion in bank funding. As a result, the Company’s industrial operations as of June 30, 2020, had a cash position of JPY 1.3 trillion (roughly USD 12.4 billion equivalent) in addition to unused committed credit lines of JPY 1.9 trillion (roughly equivalent to USD 18.1 billion). Notwithstanding the decline in earnings and sizable cash burn stemming from the coronavirus, DBRS Morningstar deems Nissan’s liquidity position sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.

Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of coronavirus, DBRS Morningstar notes that a further progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) and/or meaningful underperformance of the Company relative to its F2020 outlook could result in additional downward rating pressures. Conversely, should the worst shocks of the pandemic remain in the first half of 2020 with Nissan’s earnings trending significantly positively through the remainder of F2020, DBRS Morningstar could change the trend on the ratings to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Japanese yen unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577