DBRS Downgrades Nissan Motor Co., Ltd.

DBRS has today downgraded the short- and long-term ratings of Nissan Motor Co., Ltd. (Nissan or the Company) to R-2 (high) and BBB (high), respectively, from R-1 (low) and A (low). The rating action reflects DBRS’s assessment that the Company’s business model has been slightly weakened not only by the automotive downturn, but also in particular by the negative currency effects (i.e., the Japanese yen/U.S. dollar exchange rate) expected to prevail over the near- to medium-term. DBRS notes that recent weak operating results have deteriorated the Company’s credit metrics and increased its default risk to levels no longer commensurate with its former ratings. Furthermore, the expected recovery in Nissan’s primary automotive markets (i.e., Japan and the United States) will likely take longer than previously anticipated by DBRS, with the currency headwinds representing a structural change that will likely preclude the Company from generating sufficient profitability in the near term to restore its financial profile to recent historical levels.

The trend is Stable, as countermeasures implemented by Nissan, in addition to synergies derived from its alliance (the Alliance) with Renault S.A. (Renault), should prevent a further deterioration in the Company’s financial profile. DBRS notes that the balance sheet of Nissan’s industrial operations remains modestly leveraged, with the Company maintaining solid liquidity through the automotive and economic downturn. The ratings continue to incorporate Nissan’s solid business profile as the world’s sixth largest automotive manufacturer, with its competitive position further bolstered by the Alliance, which was initially established ten years ago.

The Company’s earnings decreased sharply in fiscal 2008 (ending March 31, 2009) into negative territory in line with the automotive downturn that resulted in significantly lower volumes in the Company’s major markets. This was accompanied by working capital absorption as Nissan reduced production in order to more closely align inventories with lower demand. As a result, the Company’s gross debt-to-total capital as of March 31, 2009 stood at 23%; this represents a substantial increase relative to the prior year level of 11%, with the industrial operations at that time also being cash positive on a net basis. Through the first half of F2009, sales continued to decrease considerably on a year-over-over basis, although the industrial operations reported a slight operating loss as implemented countermeasures and efficiencies helped offset challenging industry conditions. While revenues continue to be pressured in most major developed markets, DBRS notes that Nissan has been increasing sales in emerging automotive markets, particularly China, where volumes in F2008 improved by 19% year-over-year. Further significant growth in that market was also recorded through the first half of this fiscal year as the Company benefited by offering vehicles eligible for China’s tax incentives.

The recent weak operating results have adversely impacted the Company’s financial profile, particularly with respect to profitability- and coverage-based measures. While such measures may continue to be under pressure in the near term, DBRS does not expect Nissan’s balance sheet to be further eroded. The Company forecasts a modest operating profit for the fiscal year ending March 2010. DBRS notes that Nissan also expects to be net free cash flow (i.e., after working capital items) positive for this period, as the Company suspends dividends and curtails non-core capital expenditures. Working capital is projected to be a source of cash as inventory levels have stabilized, with Nissan expecting to increase production in the second half of the year.

Over the long term, Nissan remains well positioned to benefit from the eventual recovery in the automotive sector. DBRS notes that recently implemented efficiencies and countermeasures should bolster Nissan’s performance once industry conditions improve. Regarding new vehicle powertrain technologies, while the Company thus far been a minor player with respect to hybrid vehicles, Nissan recently unveiled its Leaf electric vehicle as part of its long-term zero-emissions strategy. Nissan expects to offer the Leaf to selected commercial fleets in 2010 and hopes to have the new model widely available by 2012. DBRS expects the ratings to remain constant over the medium term. However, in the event that the Company incurs further losses such that its financial profile is further adversely impacted, this would likely result in negative rating implications.

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

This is a Corporate rating.