DBRS Limited (DBRS Morningstar) confirmed 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., at BBB (low). The trends on the ratings remain Stable. The rating confirmations reflect the Company’s moderately improving operating performance (albeit from weak levels), which, amid the Company’s conservative financial policy and favourable balance sheet, have restored Nissan’s credit metrics and overall financial risk assessment to levels commensurate with the existing ratings. Moreover, the ratings remain underpinned by Nissan’s sound business risk assessment as a major Japanese automotive original equipment manufacturer (OEM), whose global competitiveness is bolstered by the Renault-Nissan-Mitsubishi Alliance, which has been recently restructured with the voting rights of Nissan and Renault S.A. (rated BB (high) with a Negative trend by DBRS Morningstar) now capped at equivalent levels of 15%.
Nissan’s financial results in F2022 (ended March 31, 2023) through Q1 F2023 continued to improve amid ongoing progress stemming from its current transformation program (designated by Nissan as NISSAN NEXT), although DBRS Morningstar notes such improvement remains undermined by industry headwinds. These include the global semiconductor shortage, which, although moderating, continues to constrain volumes. Additionally, the Company’s performance in China has weakened markedly because of regional coronavirus lockdowns, very challenging pricing conditions, and the strong presence of local manufacturers in the new energy vehicle segment. (DBRS Morningstar notes that several other OEMs are also currently facing significant challenges in China.) However, excluding China, Nissan’s retail sales and production volumes in Q1 F2023 increased by 20.4% and 30.5%, respectively (compared with Q1 F2022). In line with the improved sales performance, the Company’s consolidated operating margin improved to 4.4%. While this still significantly reflects the profitability of Nissan’s financial services business (which continues to perform well despite an anticipated moderation in earnings), DBRS Morningstar notes that the automotive segment was modestly profitable and generated positive net free cash flow.
Going forward, DBRS Morningstar expects Nissan’s operating performance to moderately improve further. While headwinds in the form of inflationary pressures and rising interest rates appear likely to soften consumer sentiment, DBRS Morningstar estimates that these are for the time being essentially offset by residual pent-up demand and rising production volumes. For F2023, the Company has forecast its operating margin at approximately 4.4% for the year; DBRS Morningstar deems Nissan’s outlook to be rather attainable.
Moreover, DBRS Morningstar notes that Nissan’s liquidity position remains solid. As of June 30, 2023, the Company’s automotive operations had cash balances in the amount of JPY 1.8 trillion (approximately USD 13.1 billion equivalent). Additionally, as of the same date, Nissan had approximately JPY 1.9 trillion (USD 13.9 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 1.35 trillion (USD 9.9 billion).
Consistent with the Stable trends, DBRS Morningstar expects the ratings to remain constant over the near to medium term, although material operating losses and associated cash burn in forthcoming periods could result in negative rating actions. Conversely, markedly stronger operating performance over the same 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
Environmental (E) Factors
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/416784 (July 4, 2023).
All figures are in Japanese yen unless otherwise noted.
DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
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 credit ratings are under regular surveillance.
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