Research: Rating Action: Moody’s Changes Hitachi’s Outlook to Stable; confirms the A3 rating

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Tokyo, November 15, 2022 — Moody’s Japan KK has affirmed the A3 senior unsecured rating and P-2 commercial paper rating of Hitachi, Ltd. (Hitachi).

Moody’s also changed the outlook from negative to stable.

A full list of affected classifications, including the subsidiaries supported by Hitachi, is provided at the end of this press release.

“The move to a stable outlook reflects Hitachi’s successful execution of its plan to divest non-core assets and use these products to reduce leverage,” said Roman Schorr, vice president and analyst. principal of Moody’s.

RATINGS RATIONALE

Hitachi successfully deleveraged as planned through asset disposals and reported debt reduction of JPY 322 billion (down 10% from March 2022) in the first six months of FY2022 , which ended in September 2022. Hitachi expects a net gain of JPY 297 billion on the sale of its stakes in Hitachi Transport Systems and its listed subsidiaries Hitachi Metals and Hitachi Construction Machinery and others by the end of fiscal year 2022. By repaying debt from recent years’ acquisitions, in line with Hitachi’s prudent financial policy, Moody’s expects its debt to EBITDA ratio to decrease to approximately 2.5x by year-end 2022 versus 3.0x at the end of fiscal 2020.

Hitachi’s strong business profile is supported by its diversified business portfolio. Hitachi, Japan’s largest manufacturing company by revenue, has diversification and scale that has helped stabilize its margins during the pandemic and amid persistent macroeconomic headwinds such as cost inflation and growing economic uncertainty.

Hitachi’s cash flows are becoming more sustainable, thanks to a focus on contractual services and infrastructure businesses and the disposal of cyclical segments, such as construction machinery. Its services and infrastructure businesses (Digital Systems & Services, Green Energy & Mobility, Connective Industries), which represented approximately 74% of its EBITA, performed strongly during the pandemic and against the effects of continued inflation of costs and growing economic uncertainty.

Hitachi’s profitability gap with its peers limits its rating. Its EBITA margin remained in the single-digit percentage range due to its lower, albeit more stable margin, business mix and higher fixed cost base than its competitors, while its global peers such as Siemens Aktiengesellschaft (A1 stable) and ABB Ltd (A3 stable) maintained EBITA margins around 10%-15%.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

The stable outlook reflects Moody’s expectation that Hitachi will reduce debt to fiscal 2019 levels on a constant dollar basis; maintain EBITA margins in the 7%-8% range; and adhere to its prudent financial policy to manage its level of indebtedness.

Hitachi’s low profitability compared to its global peers limits upgrade prospects. An upgrade would require the company to increase its profitability, demonstrate growth in businesses it has acquired in recent years, and improve its credit metrics, so that its EBITA margin is maintained above 10% and its debt/EBITDA falls below 2.0x.

On the other hand, Moody’s could downgrade if Hitachi’s earnings weaken due to a significant decline in its market position, so that its EBITA margin remains below 6%, its debt/ EBITDA remains above 3.0 or so it maintains negative free cash flow. . Any change to a more aggressive financial policy, including taking on leveraged acquisitions, would also put downward pressure on the rating.

The main methodology used in these ratings was Manufacturing (Japanese) published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/75073. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Based in Tokyo, Japan, Hitachi, Ltd. is the largest diversified manufacturing company in Japan.

AFFECTED RATINGS:

Issuer: Hitachi, Ltd.

…Senior regular unsecured bonds/debentures (local currency), confirmed at A3

…Commercial paper (local currency), confirmed at P-2

…Outlook changed from negative to stable

Issuer: Hitachi America Capital, Ltd.

…Backed commercial paper (local currency), confirmed at P-2

Issuer: Hitachi International Treasury Ltd.

…Backed Senior Unsecured Medium Term Note Program (Foreign Currency), Confirmed at (P)A3

…Backed commercial paper (foreign currency), confirmed at P-2

…Outlook changed from negative to stable

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued without modification as a result of such disclosure.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Romain Schorr
Vice President – Senior Analyst
Corporate Finance Group
Moody’s Japan KK
Atago Green Hills Tower Mori 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

Mihoko Manabe
Associate General Manager
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

Release Office:
Moody’s Japan KK
Atago Green Hills Tower Mori 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Customer service: 81 3 5408 4100

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