Investing.com -- Fitch Ratings has downgraded Nissan Motor Co., Ltd. (TYO: 7201 )’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured rating to ’BB’ from ’BB+’. The Short-Term Foreign- and Local-Currency IDRs remain at ’B’. The outlook is negative.

This downgrade is a reflection of worsening market conditions in North America and increasing cost pressures due to new US tariffs on the automotive sector. Fitch now predicts Nissan (OTC: NSANY )’s auto EBIT and FCF will remain negative for a second year in the fiscal year ending March 2026 (FYE26), before recovering to breakeven in FYE27.

While Nissan is expected to recover in the medium term as restructuring charges reduce and new model launches ramp up, the company has exhausted its rating headroom to absorb related short-term shocks and a potential decline in production volumes. The negative outlook reflects the deteriorating industry environment.

Nissan may benefit from rising vehicle prices and tight supply due to its strengths in entry SUV and sedan models, and mass-market pricing. However, macroeconomic uncertainties could complicate Nissan’s planned turnaround.

Tariffs announced by the US administration on auto imports are likely to lead to production cuts and increased costs, affecting automotive issuers’ profitability and weakening consumer demand. As a result, Fitch has revised the 2025 outlook for the global automotive sector to ’deteriorating’ from ’neutral’.

Nissan announced a restructuring plan that includes reducing production capacity, headcount and expenses to offset the increased costs in FYE25. Management, led by new CEO Ivan Espinosa, is expected to announce additional cost-reduction measures in May 2025, which will bolster earnings and cash generation. However, these measures will weigh on profitability and cash flow in the short term and will take at least a couple of years before having a net positive effect on FCF.

Although Honda Motor Co., Ltd. (NYSE: HMC ) and Nissan ended discussions for a merger on February 13, the two companies, along with Mitsubishi Motors (OTC: MMTOF ) Corporation, maintain their alliance for electrification. The alliance is poised to significantly accelerate investment and development in electric vehicles by leveraging shared technology and economies of scale.

Despite recent challenges, Nissan’s business profile is solid for its ratings. The company’s large scale and strong diversification also support its business profile.

On a standalone basis, Nissan is smaller than General Motors Company (NYSE: GM ), Ford Motor Company (NYSE: F ), Stellantis N.V. (NYSE: STLA ), and Hyundai Motor Company (OTC: HYMLF ). However, Nissan’s alliance with Mitsubishi Motors, Renault (EPA: RENA ), and potentially Honda provides substantial capacity for economies of scale and synergies.

Factors that could lead to negative rating action or downgrade include failure to establish a clear trend towards breakeven in operating profit and FCF in the auto segment, excluding non-recurring restructuring charges, by FYE27. The outlook will be revised to stable if the negative sensitivities are not met.

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