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Investing.com -- Fitch Ratings has revised the outlook on Renesas Electronics Corporation’s Long-Term Foreign- and Local-Currency Issuer Default Ratings to Negative from Stable, while affirming the ratings at ’BBB’.
The rating agency also affirmed the ’BBB’ rating on Renesas’ $850 million senior unsecured notes due 2026.
The negative outlook reflects expectations of a slower recovery in profitability due to prolonged weakness in automotive and industrial segments, heightened uncertainties related to US tariff policies, increased competition from China, and strategic shifts within the company.
Renesas has extended its timeline for achieving a net leverage of 1x to three to five years. Fitch expects EBITDA gross leverage to remain above 2.8x in 2025 and 2026, before improving to 2.5x or below in 2027 when a fuller recovery is anticipated.
The recently announced US tariffs will likely dampen consumer demand, prompt production cuts, and increase costs. While Renesas’ direct revenue exposure to the US was about 12% in 2024, sales in the automotive segment - which accounted for 52% of 2024 revenue - may face pressure as added costs for automakers could be shared across the supply chain.
Competition in the Chinese market remains intense as local semiconductor suppliers improve. China represented 28% of Renesas’ revenue in 2024 - the only major region to post growth. The company is focusing on technological differentiation and local manufacturing as part of its competition strategy.
Renesas’ latest strategic shift will reduce near-term profit margins as it increases investment for longer-term growth. The company is raising R&D spending and allowing its operating margin to drop to around 25% over the next two years from 27% in 2024.
The company will record a loss of about ¥250 billion in the second quarter after agreeing to convert its $2 billion deposit into Wolfspeed (NYSE:WOLF), Inc.’s convertible notes, common shares, and warrants as part of Wolfspeed’s restructuring. Wolfspeed has filed for Chapter 11 bankruptcy protection.
Fitch expects Renesas’ profitability to recover gradually, with a mid-single digit revenue decline in 2025, followed by moderate recovery in 2026-2027. Higher R&D expenses are expected to lower the EBITDA margin to around 30%-31% in 2025-2027, compared to 34% in 2024.
Despite these challenges, Renesas is expected to maintain its market positions in core segments. The company was the world’s fourth-largest automotive semiconductor company and the second-largest automotive MCU supplier in 2024.
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