Investing.com -- Moody's (NYSE: MCO ) Ratings has lowered the backed long-term senior unsecured rating of Nissan (OTC: NSANY ) Canada Inc. from Baa3 to Ba1, according to an announcement made on February 21, 2025. The outlook for Nissan Canada continues to be negative.

This action by Moody's follows similar measures taken on the ratings of Nissan Canada's parent company, Nissan Motor Co., Ltd. (TYO: 7201 ), which also saw a downgrade in its ratings and maintains a negative outlook.

The downgrade on Nissan's ratings is a response to the recent decline in the company's profitability, primarily due to a lackluster demand for its older product lineup in the US and China. Nissan also faces potential risks with its newly announced restructuring plan, which includes a target to reduce costs by JPY 400 billion by the end of fiscal year 2026.

Nissan Canada's Ba1 long-term rating aligns with the parent company's Ba1 ratings. This is based on Nissan Canada's strategic importance to Nissan, the expectation that Nissan would provide support to its Canadian subsidiary if needed, and the existing support agreement between the two entities.

However, Nissan Canada faces credit challenges such as the risk of residual value from the company's substantial lease portfolio and exposure to Nissan's performance trends. Despite these challenges, Nissan Canada's standalone assessment remains at ba2, reflecting its well-managed portfolio asset quality, sufficient capital cushion safeguarding creditors from unexpected losses, and adequate liquidity.

As of March 31, 2024, Nissan Canada's tangible common equity to tangible managed assets (TCE/TMA) stood at 48.0%. The company has a significant lease portfolio, accounting for 43.3% of managed assets as of the same date. This makes it susceptible to fluctuations in used vehicle prices. However, Moody's believes that Nissan Canada is sufficiently capitalized to absorb any potential losses from its large lease book compared to other captive auto finance companies.

Net total loans and leases declined by 11% from two years ago to CAD $6.4 billion as of March 31, 2024, due to constraints in new car supply. Nonetheless, Moody's expects the company's receivables to remain flat with a low-single-digit growth anticipated in 2025.

The negative outlook is in line with Nissan's negative outlook, influenced by expected weakening in the parent's operating margin, risks associated with the implementation of its new restructuring plan, the renewal of its aging product range, and global trade policies.

Nissan Canada's rating could be upgraded following an upgrade of the parent. Such an upgrade for Nissan could occur if it shows further progress in its restructuring program, achieves positive free cash flow and EBITA margin of around 2-3% on a consistent basis, and successfully launches new models, such as hybrid vehicles, in major markets like the US.

Nissan Canada's standalone assessment could be raised if the company's asset quality improves consistently. Conversely, Nissan Canada's rating could be downgraded following a downgrade of the parent. Nissan's ratings could be downgraded if it engages in excessive shareholder returns or if its cash flow and profitability continue to decline.

Nissan Canada's standalone assessment could be lowered if there is a consistent, significant decline in asset quality, profitability, liquidity or capitalization. However, a downward adjustment of Nissan Canada's standalone assessment without a change in Moody's assessment of Nissan's probability of support for Nissan Canada would likely not affect Nissan Canada's debt rating.

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