Moody's Japan has affirmed Nissan Motor's A3 issuer rating.
The outlook remains negative.
"Nissan's weak first quarter results indicate the challenges the company faces in achieving its guidance for this fiscal year. They also highlight the difficulties Nissan will have in turning around its business over the next few years," said Motoki Yanase, a senior credit officer.
Moody's downgraded Nissan's rating in May 2019 to reflect the continuing slide in profitability. The negative outlook reflects the execution risks in implementing its new business strategy, which the first quarter results confirmed to exist. Moody's expected that it would take some time for Nissan's strategy to prove effective, and the rating agency is allowing more time to see if Nissan can turn around, since the company has maintained its earnings guidance for this fiscal year ending March 2020 (fiscal 2019) and for the period through fiscal 2022.
Moody's affirmation follows Nissan's announcing weak results for the quarter ended June 2019, with its automotive segment reporting a JPY54.7bn operating loss. This result is a steep decline from the JPY46bn operating profit it recorded during the same quarter last year, with a 1.9% operating margin.
This profit decline resulted primarily from reduced unit sales, amid weaker demand in Nissan's key global markets, including the US, Europe and the Middle East, and loss of market share. While Nissan continues to forecast JPY230bn of consolidated operating profit and a 2% operating margin for fiscal 2019, Moody's estimates this would require a sharp business recovery during the remainder of this fiscal year, even after considering seasonality. In addition, substantial risks remain that Brexit will further lower the profitability of its European operations.
Nevertheless, Nissan has maintained its earnings targets to achieve JPY870bn of annual operating profit in fiscal 2022 (based on the pro-rata consolidation of its Chinese business) and to double its operating margin to 6% from 3% for fiscal 2019 by reducing fixed costs, increasing sales and improving its product mix.
Environmental, social and governance issues are material considerationsin Nissan's rating, and are exerting pressure on the rating, as evident in the ongoing declines in profit and sales. Requirements to reduce carbon emissions in its core markets and the consequent need to invest more in alternative fuel technologies pose material longer term challenges.
Governance concerns are also significant. Since the arrest of its former chairman, Carlos Ghosn, uncertainties about its relationship with Renault have increased, including differing ideas about the organisational integration of the two entities. Announced changes to its board arrangements may improve the governance of the company but will take time to demonstrate. Combined with the complex cross-shareholder structure with Renault, Moody's believes these unsettled governance issues could hamper the company from effectively addressing its business challenges, including realising more synergies from the joint venture.
In light of the negative outlook, Moody's is focused on the ability for Nissan to achieve its guidance for fiscal 2019 results; the company's plans to increase profit by the end of fiscal 2022, including the composition of its targeted JPY300bn of operation and investment efficiency improvement and JPY180 billion of sales growth; Nissan's plans for settling its relationship with Renault; and the potential impact of Brexit on its European business.
The negative outlook indicates that Nissan's ratings are unlikely to be upgraded.
Moody's could downgrade the rating if Nissan fails to improve its sales and margins, so that its automotive segment sustains EBITA margin below 5% or debt/EBITDA above 2.5x. In addition, any negative developments in Nissan's corporate governance and its relationship with Renault could lead to a downgrade.