Moody’s downgrades NTT and NTT Finance to A3 from A2

Investing.com -- Moody’s Ratings has downgraded Nippon Telegraph (OTC:NTTYY) and Telephone (OTC:NPPXF) Corporation (NTT) and its finance arm to A3 from A2, with a stable outlook, following NTT’s completed takeover of NTT DATA Group Corporation.

The rating action, announced Friday, includes downgrades to NTT’s long-term issuer rating, Baseline Credit Assessment to baa1 from a3, and commercial paper rating to P-2 from P-1. NTT Finance Corporation and NTT Finance Americas Inc. received similar downgrades.

"The downgrade reflects our expectation that NTT’s leverage will remain elevated for the two-to-three years following the JPY2.4 trillion buyout of NTT DATA," said Ryohei Nishio, a Moody’s Ratings Vice President and Senior Analyst.

NTT has acquired more than two-thirds ownership of NTT DATA and plans to complete the squeeze-out process to gain full ownership of the IT services and data center subsidiary.

The acquisition significantly increases NTT’s debt burden. While gaining full control over NTT DATA’s cash flow, recouping dividends previously paid to minority shareholders will not be enough to reduce the acquisition debt. Moody’s projects NTT’s debt/EBITDA will remain around the mid-4x range for the next two-to-three years, exceeding previous expectations of mid-3x.

NTT’s series of acquisitions totaling over JPY3 trillion since 2023, including JPY530 billion investments in SBI Sumishin Net Bank and SBI Holdings, demonstrate the company’s expansion focus beyond its traditional telecom business.

The company plans to maintain current levels of capital spending, growth investments, and shareholder returns, limiting free cash flow available for debt reduction. NTT aims to reduce leverage to pre-buyout levels primarily through profit growth, though Moody’s notes the timeline for such reduction remains unclear.

NTT’s consolidated EBITDA is expected to grow modestly in the next 12 months, driven by non-telecom consumer services, global IT solutions, and data center asset sales. This growth will be partially offset by likely declines in its consumer mobile communications business.

The A3 rating incorporates a one-notch uplift from NTT’s baa1 Baseline Credit Assessment, reflecting the Japanese government’s one-third ownership and the strong probability of extraordinary government support if needed.

An upgrade is unlikely in the next two-to-three years given the elevated leverage. Downward pressure could emerge if earnings deteriorate due to competition or if leverage increases further from debt-funded acquisitions.

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