Honda-Nissan deal is credit positive but Honda faces risks: Moody’s

The proposed business integration of Honda Motor Co. and Nissan Motor Co. is positive overall for the credit quality of the two Japanese automakers, but it carries risks especially for Honda, according to Moody’s Ratings.

A larger scale through integration will result in stronger credit quality, particularly for Nissan, which has significantly weaker debt metrics of the two, wrote Dean Enjo, VP-senior analyst at Moody’s. And a deal would allow the automakers to share research and development costs.

Honda has lower margins in its automotive business compared with its motorcycle business, giving it less flexibility in absorbing Nissan’s loss-making auto operations, Enjo wrote.

The two companies are facing major competitive challenges from ascendant automakers in China, which overtook Japan as the world’s biggest car-exporting nation last year and is pulling further ahead in 2024. A successful deal may hurt Honda’s bonds but benefit Nissan’s debt, and the two firms will have to contend with uniting different corporate cultures, Bloomberg Intelligence analysts Joel Levington and Tatsuo Yoshida wrote in a report.

The ¥1.1 trillion buyback announced by Honda for its own shares is credit negative for the automaker as it will erode its liquidity or credit metrics depending on the amount of cash or debt it uses to fund the buyback, Enjo wrote.

Honda is rated A3 by Moody’s, three steps above Nissan, which is ranked Baa3, the lowest investment grade level. Honda shares jumped as much as 17% on Tuesday, while Nissan was little changed. Nissan surged 24% on Dec. 18 when the potential integration came to light.

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