(The following statement was released by the rating agency)
Dec 21 - Fitch Ratings has affirmed Nissan Motor Co., Ltd.’s (Nissan) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating at ‘BBB’. The Outlook is Stable. Fitch has also affirmed the company’s Short-Term Foreign and Local Currency IDRs at ‘F3’.
Nissan’s ratings and Stable Outlook reflect expectations of a modest growth outlook in global automobile demand in 2013, driven by continued growth in the US and emerging markets, offsetting a likely further decline in Europe and sales pullback in Japan. Fitch also expects Nissan’s credit metrics to remain well within the agency’s guideline for a ‘BBB’ rating, despite short term negative impact of a decline in Chinese sales stemming from Sino-Japanese tensions and higher capex.
Nissan continues to be exposed to FX fluctuations, especially in JPY/USD movements. However, it has made consistent effort to reduce its FX exposure in recent years and Fitch believes those efforts will likely start bearing fruit in the next two to three- years. On the one hand, it is currently expanding capacities in key growth markets to increase local production and on the other hand, it is also increasing the sourcing of components in its Japanese production base from countries with more competitive pricing to reduce Yen cost exposure.
Nissan’s sales have been affected by the recent Sino-Japanese tensions as around a quarter of its retail sales volume are derived from China. Nissan’s Sep-Oct retail sales contracted sharply by 38% year on year (yoy) and as of November, production was still down nearly 50% yoy given ongoing inventory adjustments. However, the decline in retail sales narrowed to 20% yoy in November and showroom traffic is now almost back to last year’s levels. As such, Fitch believes sales will gradually rebound in coming months unless there are further escalations of the territorial dispute.
Fitch expects credit metrics to deteriorate slightly in the financial year ending March 2013 (FY13) as a result of the impact of the Chinese sales decline and higher capex. However, the agency expects credit metrics such as net leverage ratio (adjusted net debt to EBITDAR) to remain below 1.0x and to improve from FY14 onwards.
Nissan’s major shareholder and alliance partner by cross shareholding Renault SA is currently rated ‘BB+'/Stable Outlook. The strategic, operational and management linkages between the two entities could become stronger as both automakers are trying to obtain higher synergies from the alliance given the difficult industry environment.
However, in the agency’s view, factors such as the scrapping of Nissan’s dividend during the economic crisis indicate a relatively low likelihood of cash flows or assets at Nissan being channelled upstream to support Renault’s credit profile. This, in turn, indicates that the impact of Renault’s credit profile on Nissan’s would not be as significant as the linkage analysis may otherwise suggest; this leaves Fitch comfortable with up to a two-notch rating differential between the two entities.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include-
-Substantial deterioration in global auto demand
-Sustained negative free cash flow
-Adjusted net debt to operating EBITDAR to remain above 1.0x on a sustained basis
-Downgrade in Renault’s rating.
Positive: Future developments that may, individually or collectively, lead to positive rating action include--Continued improvement in business profile and market share gains in major markets
-Adjusted net debt to operating EBITDAR to stay close to net cash on a sustained basis and double digit EBITDAR margins.
-Upgrade in Renault’s ratings