Nov 26 - Fitch Ratings has downgraded Japan-based Nippon Steel & Sumitomo Metal Corporation (NSSMC)'s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and senior unsecured rating to 'BBB' from 'BBB+'. A Negative Outlook has been assigned. The agency has also downgraded NSSMC's Short-Term Foreign and Local Currency IDRs to 'F3' from 'F2'.
The downgrade reflects NSSMC's weakened financial profile amid a global steel industry downturn. Leverage has increased significantly as a result of lower profitability stemming from weak demand and prices, after adjusting for the adverse impact on leverage from the merger between Nippon Steel and Sumitomo Metal on 1 October 2012. The increase in leverage from the merger is, by itself, neutral on ratings due to offsetting impact from an improved business profile and potential synergies of the merged entity.
Fitch now expects the pro-forma net leverage ratio of the merged entity to reach 5x-6x in FY13 and FY14, well exceeding the agency's previous guideline of 3.0x. The Negative Outlook reflects low visibility and uncertainty regarding the likely recovery of the steel industry recovery in 2013.
The global steel industry, which has been weighed down by a slowdown in the Chinese economy since H211, remained sluggish throughout 2012. Easing pressure from raw material price inflation has been offset by slower demand, leading to further contraction in steel margins. As a result, NSSMC's H1FY13 (financial year ending March) operating performance has been well below Fitch's expectations. The combined operating profit of Nippon Steel and Sumitomo Metal during the period was JPY13bn, compared with JPY106bn a year ago.
The merged entity is now the second-largest steel manufacturer globally with annual production capacity close to 50 million tons. It will also have a more than 40% share in the Japanese steel market with technology leadership in products such as automotive steel and specialised pipe products.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-Adjusted net debt/EBITDAR exceeding 4.25x on a sustained basis
-Delay in the recovery of the steel industry that would result in a worse-than-expected business environment and slower margin recovery
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-Adjusted net debt/EBITDAR falling below 4.25x on a sustained basis
-Stabilisation of net debt levels, combined with improved profitability