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Investing.com -- Moody’s Ratings has announced the downgrade of Nissan Motor Co., Ltd. (TYO:7201)’s corporate family rating (CFR) and senior unsecured rating from Ba1 to Ba2. The rating agency has maintained a negative outlook for the company.
The downgrade is a result of the ongoing weakness in Nissan (OTC:NSANY)’s credit profile, particularly its automotive free cash flow and EBIT margin. The negative outlook also reflects the risks associated with Nissan’s restructuring plan, the renewal of its aging product range, and the ongoing tariffs on automotive imports in the US.
Nissan’s profitability has been impacted by the slowing demand for its older models. The company has been facing challenges in the US, its largest market by volumes, due to high sales incentives, high inventories, and an aging model lineup. Nissan’s weak performance in China since the fiscal year 2023, which ended in March 2024, has also contributed to the downgrade.
The company has been implementing a restructuring plan aiming to cut costs by JPY500 billion by the end of fiscal 2026. However, the high initial costs in fiscal 2025 will limit the possibility for a rapid improvement in free cash flow and EBIT margin in the coming 12 months. Moody’s projects that Nissan’s automotive EBIT margin will remain negative through fiscal 2025 and will breakeven in fiscal 2026.
The current global trade environment also poses a risk to Nissan’s recovery. The company’s sizeable production base in Mexico and Japan is affected by automotive import tariffs. The company estimates that the impact of tariffs on operating profit will be JPY450 billion annually before mitigation measures.
Despite these challenges, Nissan’s Ba2 CFR reflects the company’s global presence and brand recognition in major auto markets. The company’s substantial cash holdings in its automotive business will provide sufficient liquidity for its current negative free cash flow and automotive business debt maturities over the next 12 months.
However, these strengths are offset by its current negative EBIT margin and negative free cash flow in its automotive business. The company also faces risks in the US in the form of execution risk with its restructuring program, an aging product lineup, and potential import tariffs.
The negative outlook reflects Moody’s expectation that the company’s credit metrics, such as automotive EBIT margin and free cash flow, may worsen due to risks associated with the execution of its restructuring plan and global trade policies. The negative outlook also incorporates risk in renewing its aging product portfolio given changing consumer preferences in key markets such as the US and China.
Given the negative outlook, an upgrade of Nissan’s CFR is unlikely over the next 12-18 months. However, the outlook could return to stable if Nissan makes further progress in its restructuring program through positive free cash flow and positive EBIT margin, both on a sustained basis. The outlook could also stabilize if the company successfully launches new models, such as hybrid vehicles, in major markets such as the US, and if Nissan can effectively mitigate the full impact of import tariffs in the US.
A significant erosion in liquidity could lead to a further downgrade. Nissan’s CFR could be downgraded if it engages in excessive shareholder returns or if cash flow and margin continue to become further negative. Lack of execution in Nissan’s current restructuring plan through fiscal 2026 will also be a consideration when downgrading the rating.
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