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