DBRS Limited (DBRS Morningstar) changed the trends on 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 Stable from Negative while confirming these ratings at BBB (low). The trend changes reflect the moderately improving operating performance (albeit from weak levels) of the Company. While credit metrics remain somewhat weak for the currently assigned ratings, the Company’s conservative financial policy and favourable balance sheet help support its overall financial risk assessment (FRA). Moreover, the ratings remain underpinned by Nissan’s sound business risk assessment as a major Japanese automotive original equipment manufacturer, whose global competitiveness is bolstered by the Renault-Nissan-Mitsubishi Alliance (the Alliance), notwithstanding challenges in recent years associated with the Alliance’s ongoing implementation.
Nissan’s financial results in F2021 (ended March 31, 2022) through Q1 2022 have improved amid progress stemming from its current transformation program (designated by Nissan as NISSAN NEXT); although, DBRS Morningstar notes such improvement has also been undermined by varying significant industry headwinds, most recently in the form of the ongoing global semiconductor shortage. Despite this, the Company has attained several benchmarks outlined in NISSAN NEXT, including unit revenue gains in line with a firmer product mix and pricing. While this is partly a function of the present industrywide gap between vehicle demand and supply, it also reflects favourable market acceptance of Nissan’s recently launched models, in addition to decreased exposure to (the typically less profitable) fleet sales channels. Additionally, the Company achieved targeted cost reductions in the amount of JPY 350 billion (vis-à-vis a F2018 base).
Going forward, DBRS Morningstar expects Nissan’s operating performance (and, by extension, its FRA) to moderately improve further. While headwinds in the form of inflationary pressures, rising interest rates, and increased geopolitical uncertainty appear likely to soften consumer sentiment, DBRS Morningstar estimates these are (for the time being) essentially offset by rising production volumes as the global semiconductor shortage progressively moderates. Additionally, DBRS Morningstar notes the Company’s exposure to Europe (the region that in our estimation is deemed the most vulnerable to the above-cited headwinds) is relatively modest and well manageable.
Moreover, despite sizable negative free cash flow generation in recent years, DBRS Morningstar notes Nissan’s liquidity position remains solid. As of June 30, 2022, the Company’s automotive operations had cash balances in the amount of JPY 1.4 trillion (approximately USD 10.7 billion equivalent). Additionally, as of the same date, Nissan had approximately JPY 2.1 trillion (USD 16.2 billion) available in unused committed credit lines. Moreover, taking further into account intercompany loans to the sales financing business (not included by DBRS Morningstar in its calculation of Nissan’s credit metrics), the Company’s automotive operations had a sizable net cash position of JPY 826 billion (USD 6.4 billion).
Consistent with the Stable trend, DBRS Morningstar expects the ratings to remain constant over the near to medium term; although, increasing losses of Nissan in forthcoming periods would likely result in negative rating actions. Conversely, markedly stronger operating performance over the similar time horizon could have positive rating implications; DBRS Morningstar notes, however, such improvement stands to be hindered by significant cost headwinds (in the form of ongoing investments associated with the increasing electrification of the automotive fleet) facing the industry.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as the rapid spread of electrified vehicles and stricter regulations on greenhouse gas emissions around the world require an initiative aiming for carbon neutrality across the whole lifecycle of cars. Delays in Nissan’s responses to these environmental requirements could affect its financial position and business performance.
In January 2021, Nissan announced a new goal to achieve carbon neutrality across the Company’s operations and the lifecycle of its products by 2050. As part of this effort, by the early 2030s, every all-new Nissan vehicle offering in key markets will be electrified. Nissan will take initiatives to achieve this new goal by further improving environmental measures and activities that create social value, such as a reduction in carbon dioxide emissions and the commercialization of electrification technologies.
While the environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Nissan. There were no social or governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in Japanese yen unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).
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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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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