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Factbox: Rated one notch above junk, Nissan can still repay its debt

TOKYO (Reuters) - Japan's Nissan Motor Co 7201.T is struggling to revive a fortune that was weakened by scandal and worsened by the COVID-19 pandemic.

FILE PHOTO: The brand logo of Nissan Motor Corp. is displayed during a press preview of the company's new Ariya all-battery SUV, ahead of the world premiere, at Nissan Pavilion in Yokohama, south of Tokyo, Japan July 14, 2020. REUTERS/Issei Kato

The automaker warned in July of a record 470 billion yen (3.36 billion pounds) operating loss for the year to March 2021 and its lowest sales in a decade, as global auto sales slumped.

Both Moody’s Investors Service and S&P Global rate Nissan’s debt at Baa3 and BBB-, respectively, one step above non-investment grade. Both agencies have negative outlooks on the debt.

Analysts, however, say Nissan has the ability to repay its debt, at least in the short term. S&P analyst Katsuyuki Nakai said Nissan’s short-term liquidity remains at a high level due to its ties with banks.

“We see Nissan’s close relationship with banks will not change,” Nakai said.

The company reports quarterly results on Thursday, where analysts expect it to trim its full-year loss forecast.

FOREIGN BOND SALE

The automaker’s ample cash is partly due to a big foreign bond sale in September, said Kousuke Okajima, a credit analyst at Nomura Securities. But the bonds, which have relatively high coupons, have also boosted its debt-payment burden, he added.

Nissan sold $8 billion of dollar-denominated debt and 2 billion euros of bonds in September, its first foreign-currency denominated bonds since the automaker's alliance with France's Renault RENA.PA in 1999.

It offered 4.81% interest on $2.5 billion of 10-year bonds and 4.345% on the same amount of seven-year debt, according to the company. The eight-year, 750 million euros bonds had a 3.201% coupon at the time of the sale.

Given Nissan’s lower probability for default, the coupons are seen as relatively high and have become popular among foreign investors hunting for yield, Okajima said.

Nissan may have opted for foreign bonds as its capacity for domestic borrowing is reaching a limit, he said, citing a domestic bond sale in July where appetite was muted.

In that sale, it sold 70 billion yen worth of bonds, or 14% of the maximum of 500 billion it had applied to sell.

NET CASH

As Nissan saw its profits falling, its net cash, or cash minus debt, for its auto business fell to 235.2 billion yen at the end of June, from about 1 trillion yen in March, half of the level of rival Honda Motor Co 7267.T.

In the fiscal year ended March 2017, when Nissan bought a 34% stake in Mitsubishi Motors Corp 7211.T, net cash stood at 1.6 trillion yen.

DEBT

Nissan has 2.3 trillion yen of outstanding debt, including bank loans, according to Refinitiv’s Eikon. Of which, some 1.34 trillion yen of debt will mature between 2021 and 2023.

Toyota has 10.78 trillion yen in debt, while Honda has 4 trillion yen, according to Eikon.

The Japanese government has guaranteed 40% of 713 billion yen of financing for Nissan from various lenders, Reuters has reported, including loans from the state-backed Development Bank of Japan, and from Mizuho Financial Group 9411.T.

PROBABILITY OF DEFAULT

Eikon shows Nissan's probability of default at 16.807%, based on the performance of credit-default swaps protecting Nissan's debt for five years NISB5YJPAC=R. That compares with Toyota Motor Corp's 7203.T 1.487% TOYC5YJPAC=R and Honda Motor Co's 7267.T 2.765%. HONB5YJPAC=R

Nissan's weighted average cost of debt, a measure of how risky lenders see the company, is 1.22%, higher than the 0.84% average for all companies on the Nikkei 225 Stock Average .N255, according to Refinitiv data.

S&P’s Nakai says Nissan’s debt rating could fall into junk status under various scenarios including weak sales in China and the United States for a prolonged period, and if Nissan’s restructuring does not proceed as planned.

Nissan in May announced a four-year recovery plan, pledging to slice 300 billion yen from annual fixed costs and become a smaller, more efficient company after the pandemic exacerbated a slide in profitability.

Reporting by Junko Fujita; Additional reporting by Rocky Swift; Editing by David Dolan and Muralikumar Anantharaman

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