DBRS Morningstar Confirms Nissan Motor Co., Ltd. at BBB (low); Trend Remains Negative

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Nissan Motor Co., Ltd. (Nissan or the Company) as well as the Senior Unsecured Debt rating of its subsidiary, Nissan Canada Inc., at BBB (low). The confirmation reflects the Company’s moderately improving operating performance (albeit from weak levels) amid progress on its current transformation program (designated as Nissan NEXT by the Company). This improvement in conjunction with Nissan’s conservative financial policy prevent its financial risk assessment from deteriorating to a level that would warrant another downgrade. The ratings remain underpinned by Nissan’s business risk assessment as a major Japanese automotive original equipment manufacturer (OEM) whose global competitiveness is bolstered by the Renault-Nissan-Mitsubishi Alliance (the Alliance), notwithstanding challenges in recent years associated with the Alliance’s implementation. The trend on the ratings remains Negative, however, as Nissan’s operating performance (notably that of the automotive operations) remains lacklustre amid meaningful industry uncertainty associated with the ongoing global semiconductor shortage.

While Nissan’s financial results in F2020, ended March 31, 2021, declined materially year over year, DBRS Morningstar notes that this reflects notably weak performance in Q1 F2020 that was particularly exacerbated by the global outbreak of the Coronavirus Disease (COVID-19) pandemic, with the Company’s operating performance improving over the remainder of the fiscal year. This trend continued in Q1 F2021, in which Nissan, despite industry headwinds associated with the semiconductor shortage, generated a consolidated operating margin of 3.8%. However, this figure significantly incorporates the strong performance of the Company’s sales financing business as the automotive operations incurred additional, albeit narrowing, losses.

The Company is also beginning to attain some key objectives outlined in its Nissan NEXT strategy toward generating sustained profitability in the future (in contrast to prior targets that primarily focused on ongoing growth). Among these are cost reductions that include lowering Nissan’s breakeven production level to 4.4 million units (with a 20% decrease in its F2018 production capacity also targeted by the end of F2023). Additionally, amid a deliberate reduction in fleet sales (notably in daily rental) that has facilitated a decrease in incentives, the Company is further improving the quality of its sales through recent product launches that have resulted in higher transaction prices as well as share gains in selected segments, notably including the key sports utility vehicle (SUV) segment in the United States. Nissan is also looking to progressively increase the electrification of is automotive fleet. DBRS Morningstar notes that the Company has historically maintained a solid position in battery electric vehicles (BEVs), highlighted by the longstanding Nissan Leaf/Renault Zoe models, although competition in this segment will increase sharply given the heightened focus in this space from substantially all the OEMs going forward.

Despite sizable negative free cash flow generation in recent years, Nissan’s liquidity position remains solid. As of June 30, 2021, the Company’s automotive operations had a cash balance of JPY 1.7 trillion (approximately USD 15.5 billion equivalent). Additionally, as of the same date, Nissan had approximately JPY 2.0 trillion (USD 18.26 billion) available in unused committed credit lines. Moreover, taking into account intercompany loans to the sales financing business (which DBRS Morningstar does not include in its calculation of Nissan’s credit metrics), the Company’s automotive operations had a sizable net cash position of JPY 745 billion (USD 8 billion).

Consistent with the Negative trend on the ratings, increasing losses at Nissan in the forthcoming periods would likely result in a downgrade. Conversely, markedly stronger operating performance over a similar time horizon could have positive rating implications; DBRS Morningstar notes, however, that such improvement stands to be hindered by significant cost headwinds (in the form of ongoing investments associated with the increasing electrification of the automotive fleet) facing the industry.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Japanese yen unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020; https://www.dbrsmorningstar.com/research/368670) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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