Mitsubishi Motors 'BB+' Rating Placed On CreditWatch Negative On COVID-19 Pandemic

  • We believe downward pressure on Mitsubishi Motors' profitability is likely to further increase, owing to the severe business conditions caused by the COVID-19 pandemic.
  • Considering the likely very weak sales in key markets and disruption to global supply chains, together with fluctuating foreign exchange rates, we believe the company's EBITDA margin will not recover as we had expected.
  • We are placing our rating on Mitsubishi Motors on CreditWatch with negative implications.
  • We intend to resolve the CreditWatch placement following the announcement of the company's fiscal 2019 results. We intend to re-examine our base-case assumptions regarding projections for the company's new car sales, global production, and financial performance over the next one to two years.
TOKYO (S&P Global Ratings) March 25, 2020--S&P Global Ratings today said that it has placed its 'BB+' long-term issuer credit rating on Mitsubishi Motors Corp. on CreditWatch with negative implications. The CreditWatch placement reflects our view that the company's EBITDA margin will face considerable pressure due to the rapid deterioration of business conditions caused by the COVID-19 pandemic. We believe the company's EBITDA margin could decline further, reaching a level that is not commensurate with the rating, given the expected very weak car sales in key markets, possible disruption to global supply chains, and the risk of volatile foreign exchange rates.
We expect Mitsubishi Motors' EBITDA margin (excluding its captive finance operations) to drop to below 5% in fiscal 2019 (ending March 31, 2020), from 6.8% in fiscal 2018, and believe it could further decline. S&P Global Ratings expects extremely harsh business conditions over the next one or two years. We assume annual new car sales will fall in North America by 15%-20% year-on-year in 2020 and recover by 10%-12% in 2021. In the same years, respectively, we assume they will fall 15%-20% and recover 9%-11% in Europe; and fall by 8%-10% and recover by 2%-4% in China. We believe downward pressure on sales will also increase in Southeast Asia, a key market for the company, over the next few years. In our opinion, the negative effects of disruption to its supply chains will likely grow unless the COVID-19 pandemic is contained quickly. In addition, we believe fluctuating foreign exchange rates and possible one-off resutructuring expenses could also hurt the company's earnings.
However, we expect Mitsubishi Motors to remain free of debt thanks to its continued financial discipline. The company has a net cash position of ¥360 billion (as of December 2019). We expect Mitsubishi Motors to rein in capital expenditure in response to current conditions. Furthermore, Mitsubishi Motors has sought to lower its capital expenditure burden and research and development costs in recent years by making the most of its alliance with Renault S.A. and Nissan Motor Co. Ltd. We see this as a clear example of the company's conservative financial management.
We intend to resolve the CreditWatch placement within 90 days. Following the company's announcement of its results for fiscal 2019, we intend to re-examine our base-case assumptions regarding projections for Mitsubishi Motors' new car sales, global production, and financial performance over the next one to two years. We will also consider company's new mid-term business plan, as well as any strategic efforts with its alliance partners. We may lower the rating by one notch if we believe Mitsubishi Motors' adjusted EBITDA margin is unlikely to recover to above 6% over the next one to two years.
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