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Moody's downgrades Nissan over declining profitability

Moody's Japan K.K. on May 24 downgraded Nissan Motor Co. Ltd.'s issuer rating to A3 from A2, citing weakening profitability brought about by weak sales in the U.S. The outlook is negative.

The rating agency said automaker's margins have declined over the past two years due to shrinking operating profit for North America because of high sales incentives offered in the U.S. Its consolidated operating margin fell to 2.7% in fiscal 2018 from 4.8% the year before.

Moody's said Nissan expects the margin to continue weakening to 2.0% in fiscal 2019, reflecting the weakness in its core automotive segment, which recorded a 0.9% operating margin in fiscal 2018 that is now significantly below its peers'.

The agency noted that it will take several years for Nissan's new strategy — which focuses on margin over unit sales growth, refreshes old models to improve its brand value, and lowers bulk sales at discounted prices — to show results.

Moody's said it will also take time to prove the effectiveness of the new governance framework that Nissan will implement this year as leadership and ownership remain uncertain following the ouster of its former chairman Carlos Ghosn.

Moody's also said that Nissan's alliance with the French automaker Renault SA will affect its credit quality. It said the lack of a resolution on the future of the alliance could delay the two companies' efforts to increase synergies between them.

The negative outlook on Nissan reflects execution risk as the automaker implements its business strategies globally, reforms its corporate governance and stabilizes its alliance with Renault, Moody's added.

The agency said the outlook could return to stable if the automaker maintains its EBITA margin in the upper 5% range, and return to a positive free cash flow position after dividends. However, it said an upgrade on Nissan's ratings is unlikely.

The rating change comes days after S&P Global Ratings also downgraded the Japanese carmaker.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.