Investing.com -- Moody's (NYSE: MCO ) Ratings has lowered all ratings for Nissan (OTC: NSANY ) Motor Acceptance Company LLC (NMAC), including its backed senior unsecured rating to Ba1 from Baa3. The downgrade also includes NMAC's senior unsecured MTN program rating and commercial paper rating, which now stand at (P)Ba1 and Not Prime, from (P)Baa3 and Prime-3 respectively. The standalone assessment for NMAC has been reduced to ba2 from ba1, with a negative outlook maintained.

This rating action follows similar steps taken for NMAC's parent company, Nissan Motor Co., Ltd. (TYO: 7201 ) (Nissan), which also saw its ratings downgraded and a negative outlook assigned.

The downgrade comes in the wake of reduced profitability for Nissan, attributed to weak demand for its older product range in China and the US. Furthermore, Nissan is facing risks related to its recently announced restructuring plan, aiming to reduce costs by JPY 400 billion by the end of fiscal year 2026.

The Ba1 long-term ratings for NMAC are in line with Nissan's ratings, reflecting NMAC's strategic importance to Nissan and the expectation of support from Nissan if needed. NMAC's credit challenges include high dependence on securitization funding and exposure to Nissan's performance trends.

NMAC's standalone assessment was downgraded due to weakened capitalization. The tangible common equity to tangible managed assets (TCE/TMA) ratio was 11.1% as of September 30, 2024, below the three-year average of 15%, following a $2 billion dividend payment in the first two quarters ended September 30, 2024. TCE/TMA is expected to decline further over the next 12-18 months as NMAC may continue to distribute dividends to its parent company to boost liquidity, partially offset by a reduction in NMAC's total assets due to challenges with Nissan's aging portfolio in the US.

NMAC's sizable lease portfolio, which accounted for 30.0% of total loans and leases as of September 30, 2024, exposes it to a potential fall in used vehicle prices. However, NMAC has an agreement with its parent company, providing indemnification from losses related to the lease portfolio, which makes NMAC less vulnerable to a decline in used vehicle prices. NMAC's asset quality remains strong with net charge-offs to loan receivables of 0.6% as of September 30, 2024, lower than the pre-pandemic level of 0.76% as of December 31, 2019.

The negative outlook for NMAC aligns with that of Nissan, based on the expected weakening of the parent's operating margin, risks related to the new restructuring plan, the renewal of its aging product range, and global trade policies.

NMAC's ratings could be upgraded if Nissan makes progress in its restructuring program through positive free cash flow and EBITA margin of around 2-3%, both on a sustained basis. An upgrade could also be considered if Nissan successfully launches new models, such as hybrid vehicles, in major markets like the US, leading to a recovery in sales volumes and improved profitability.

Conversely, NMAC's ratings could be downgraded if Nissan engages in excessive shareholder returns or if cash flow and profitability continue to deteriorate. A downgrade could also occur if Nissan's automotive business remains loss-making or if it continues to have negative free cash flow after dividends over a sustained period. A weakening of its balance sheet and liquidity, including from share buybacks, would also result in a downgrade. Lack of execution in Nissan's current restructuring plan through fiscal year 2026 would also be credit negative.

A downward adjustment of NMAC's standalone assessment could occur if there is a significant decline in asset quality, profitability or liquidity, or if leverage increases.

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