DBRS Changes Trend on Nissan Motor Co., Ltd.’s BBB (high) and R-2 (high) Ratings to Positive from Stable

DBRS has changed the trend on the BBB (high) Senior Unsecured Debt and the R-2 (high) Commercial Paper ratings of Nissan Motor Co. Ltd. (Nissan or the Company) to Positive from Stable. The trend change takes into consideration the Company’s solid business and financial risk profiles and reflects Nissan’s considerably improved financial performance in fiscal 2010 (F2010, ending March 31, 2011) through the first half of F2011, with the Company’s current credit metrics effectively exceeding the assigned ratings. DBRS also notes that Nissan has outperformed its peers and achieved market share gains across most geographic market segments (most notably China) through a stronger product cadence. DBRS also notes that the increasing prominence of China effectively represents a strengthening of the Company’s business profile, with overall performance becoming heavily influenced by China (the world’s largest and fastest-growing market) and the United States. As a consequence, Nissan has become significantly less dependent on its native Japanese market (which has been subject to a structural decline for a protracted period). Notwithstanding this progress, DBRS also recognizes that Nissan faces numerous significant headwinds, including economic uncertainties in many major developed markets as well as ongoing foreign exchange headwinds (most notably the Japanese yen–U.S. dollar exchange rate).

Following two years of lacklustre performance stemming from the global economic downturn, the Company’s profitability was significantly stronger in F2010. The improved earnings were a result of higher volumes and a positive mix, in line with the ongoing growth of the global automotive industry and highlighted by sharp increases in China and a moderate recovery in North America. Supplementing the positive effects of volumes and mix were achieved efficiencies, with operating margins of the automotive divisions exceeding 5%, which, although below the high levels prior to the economic downturn, remain solid for the industry.

Through the first half of F2011, the Company’s positive year-over-year sales trend continued, with Nissan’s global market share exceeding 6%. Regions where the Company achieved notable gains include China and Europe (the latter primarily reflecting the Company’s increased presence in Russia). Despite the higher revenues, operating margins of the automotive division declined moderately, primarily as a result of increases in raw material costs and the adverse effects of foreign exchange, which alone reduced operating earnings (on a year-over-year basis) by JPY 148 billion (approximately $1.8 billion) in F2010 and JPY 106 billion (approximately $1.3 billion) in H1 F2011. After adjusting for the foreign exchange effects, DBRS notes that operating margins of the automotive division in F2010 and H1 F2011 were 7.1% and 8.0%, respectively, in line with historical levels and very favourable for the industry.

DBRS notes that the Company’s performance through the first half of this fiscal year remained solid, notwithstanding the modest decline in earnings, with Nissan notably outperforming its Japanese-based peers. This partly reflects the Company’s relative resistance to the adverse effects of the Great East Japan Earthquake of March 11, 2011. While Nissan’s global production in April 2011 declined by 22% year over year, monthly global production by May was already 19% higher year over year (with similar increases persisting in the following months) as the Company benefited from solid parts and components inventory levels. In contrast, production declines for other major Japanese automotive manufacturers proved significantly more protracted. As such, Nissan’s F2011 production is not judged to have been materially adversely affected by the earthquake. With respect to the recent floods in Thailand, local (partial) production resumed as of November 14, 2011, and production outside of Thailand was unaffected.

DBRS notes that Nissan’s financial profile is very solid. The debt position of the automotive operations is modest, with net debt-to-total capitalization as of September 30, 2011, amounting to only 2% (as calculated by DBRS). Furthermore, income and cash flow-based coverage measures for F2010 and H1 F2011 are also strong, and the Company’s current credit metrics effectively exceed the assigned ratings.

In June 2011, Nissan announced a new medium-term business plan, “Nissan Power 88,” that features two broad strategic objectives: an 8% global market share by F2016 as well as sustained operating margins of 8% by that time. Additional targets in support of the high-level objectives include the following: expansion of the Company’s product line; increased focus on growth markets, in particular the BRIC nations (Brazil, Russia, India and China), and establishing a leadership position in zero-emission electric vehicles (EVs). Nissan Power 88 also focuses on cost control, with the Company targeting total cost reductions of 5% per year. DBRS views Nissan’s high-level medium-term targets as somewhat aggressive, noting that the Company must prove particularly successful in emerging markets (which represent the predominant source of future growth for the global industry) in order to meet its objectives.

With respect to expansion in emerging markets, Nissan is planning to increase its production capacity in China to more than 1.2 million units by F2012. The Company has achieved substantial market share gains in Russia through new product introductions. Nissan also recently announced plans to construct a new manufacturing facility (with an annual capacity of 200,000 units) in Brazil by 2014. Similarly, in India, the Company aims to increase its production capacity to 400,000 units over the medium term.

Nissan’s business profile benefits further from its alliance (the Alliance) with Renault S.A. DBRS notes that the Alliance was expanded last year through the strategic cooperation (as well as modest cross shareholdings) with Daimler AG, intended to enable sharing of technology costs and best practices as well as increasing the scale and capacity utilization of the companies. Through the Alliance, and following the introduction of the LEAF EV last year, the Company is seeking to establish a leading position in EVs, with the Alliance planning to launch eight EVs by 2014. Furthermore, the Company is expanding the application of environmentally friendly technologies across its product portfolio and is marketing these efforts as its Pure Drive initiative.

In spite of ongoing foreign exchange headwinds and uncertainties in various mature automotive markets, DBRS considers Nissan’s ratings to be subject to positive rating action, in line with the Company’s expected favourable performance amid global industry volumes that are forecast to progressively increase (particularly in emerging markets). Should Nissan be able to sustain its strong recent performance, this would likely lead to a ratings upgrade.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Automotive, which can be found on our website under Methodologies.