Japanese automobile manufacturers Honda and Nissan agreed to start discussions about a merger on Monday, December 23. The potential merger is a probable strategy against the company’s Chinese rivals and Elon Musk’s Tesla.
The American ratings agency Moody’s on Tuesday, December 24, voiced their concerns over the formation of the Japanese auto behemoth, reported the news agency Bloomberg.
The rating agency said that Honda‘s lower margins in its automotive business compared to its motorcycle business are set to give less flexibility to absorb Nissan’s loss-making auto operations, according to Dean Enjo, VP-senior analyst at Moody’s, cited the news agency.
The analyst also noted that the Honda Motor Co. and Nissan Motor Co. deal is overall a positive deal regarding the credit quality of the two Japanese brands, apart from the risks to Honda, as per the news report.
A large-scale integration will result in stronger credit quality, especially for Nissan, the company which has weaker debt metrics in between the two, as per the agency report citing Enjo’s note. A deal will allow the automakers to share research and development costs, said the analyst.
Both automakers are facing major competitive challenges from their Chinese rivals. China as a country overtook Japan to become the largest car-exporting nation last year, and the momentum is pulling through in 2024, according to the news report.
According to Bloomberg Intelligence analysts Joel Levington and Tatsuo Yoshida, cited in the news report, the success of the Honda-Nissan deal may hurt Honda’s bonds but benefit Nissan’s debt, as the firms will have to contend with merging their different corporate cultures.
Liquidity Risk
Honda’s ¥1.1 trillion buyback plan is a credit negative for the automaker as it will burn the liquidity or credit metrics depending on the amount of cash or debt it uses to fund the buyback, said Enjo, cited the news agency.
Honda’s corporate bonds are currently rated “A3” by Moody’s, as compared to Nissan’s bonds at “Baa3”, the lowest investment grade level. Honda shares rose 17 per cent on Tuesday, while Nissan’s shares had a flat response. Earlier, Nissan’s shares surged 24 per cent on December 18 when the potential development of the two brands collaborating came to light, according to the agency report.