Moody's Japan has downgraded the issuer rating of Nissan Motor to A3 from A2. The outlook is negative.
Moody's began its review for downgrade on 19 February 2019.
"The downgrade reflects the continuing slide in Nissan's profitability, driven by weak sales in the US, its largest market," said Motoki Yanase, a Moody's senior credit officer.
Nissan's margins have deteriorated over the past two years, because of the contraction in its operating profit for North America, due to high sales incentives offered in the US.
Its consolidated operating margin fell to 2.7% in fiscal 2018 (the year ended March 2019) from 4.8% the year before. The company expects the margin to continue weakening to 2% in fiscal 2019. This drop reflects the weakness in its core automotive segment which recorded a 0.9% operating margin in fiscal 2018 that, Moody's said, is now materially below its peers'.
Nissan's new strategy emphasises margin over unit sales growth, refreshes old models to improve its brand value, and lowers bulk sales at discounted prices. Moody's believes that the success of this strategy will take several years to demonstrate.
It will also take time to prove the effectiveness of the new governance framework that Nissan will implement this year while management and ownership uncertainties linger, after the ouster of former chairman Carlos Ghosn.
Moody's said Nissan's alliance with Renault (which it rates at Baa3 stable) – its largest shareholder with a 43% stake – will affect its credit quality. Lack of a resolution on the future of their alliance structure could hinder the two companies' efforts to increase synergies between them.
The ratings agency added the negative outlook on Nissan reflects execution risk as the automaker implements its business strategies globally, reforms its corporate governance and stabilises its alliance with Renault.
Moody's said it could further downgrade Nissan's rating, if the turnaround in the company's sales and margins is inadequate, such that its EBITA margin
remains below 5% on a sustained basis.
It could reassess Nissan's rating in a relatively short period, within the next six months, unless the automaker "demonstrates further clarity on the path to turn around its profitability and improve free cash flow generation over the next few years".
A downgrade is also possible, if there are adverse developments in Nissan's corporate governance or its relationship with Renault.
"Given the negative outlook, an upgrade is unlikely in the near term. The outlook could be stabilised if Nissan demonstrates a clear path towards achieving an EBITA margin above 5% and returning to a positive free cash flow position after dividends," the ratings agency concluded.
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