DBRS Changes Trend on Nissan’s Ratings to Negative

DBRS has today changed the trend on the A (low) Senior Unsecured Debt rating of Nissan Motor Co., Ltd. (Nissan or the Company) to Negative from Stable, as well as on the R-1 (low) Commercial Paper rating. The trend change reflects the recent weak operating results and sharp increase in debt levels attributable to highly deteriorating market conditions. Furthermore, given the very challenging environment, there is an increased potential that earnings will remain under pressure, resulting in credit protection measures that would weaken to levels no longer commensurate with Nissan’s current ratings.

DBRS notes that the increased leverage is primarily due to high working capital absorption that was close to JPY 500 billion for the nine months ending December 31, 2008. While not expected to be permanent, the severity of the working capital use is greater than anticipated by DBRS. As a result, Nissan’s industrial net debt as of December 31, 2008, amounted to JPY 783.5 billion, which represents a marked shift from the JPY 180.2 billion net cash position reported as of fiscal year-end 2007 (ending March 31, 2008). The high working capital usage is a function of a severe downturn across the Company’s primary markets. In the United States (Nissan’s most important market), total industry volumes dropped 21% year over year over the nine months ending December 31, 2008. Additionally, Japan and Europe also had declines over the same period of 6.4% and 8.3%, respectively, as the economic challenges in the United States proliferated globally.

As a result of the very weak market conditions, the Company’s operating income for the nine months ending December 31, 2008, was JPY 92.5 billion, a decrease of 84% from the JPY 579.1 billion generated one year earlier. DBRS notes that the sharp appreciation of the Japanese yen also contributed significantly to the lower operating income. Nissan has revised its forecast for fiscal 2008 (ending March 31, 2009) and now projects an operating loss of JPY 180 billion; this implies that the Company expects to incur a loss of approximately JPY 270 billion in the fourth quarter of fiscal 2008.

Nissan, as with many other automotive manufacturers, has initiated several measures to help it withstand the current downturn. Labour costs in fiscal 2009 are projected to be 20% lower than fiscal 2008. Additionally, the Company has significantly cut production, with plants in the United States operating on lower production days. Capital expenditures are also slated to be reduced by 14% relative to the prior year’s levels. Finally, Nissan has also suspended shareholder dividends indefinitely.

Despite weak markets that are projected to persist over the near term and pressure earnings, DBRS expects Nissan’s cash burn to moderate. As the Company ultimately aligns its production with lower demand levels, the working capital absorption should be reversed, resulting in a source of cash for the Company. If this is achieved and Nissan continues to perform reasonably well amid difficult market conditions, the trend of the ratings could be returned to Stable. However, in the event that recent losses continue unabated and debt levels increase further, this would likely have negative rating implications.

Notes:
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.