Nippon Steel's credit rating has been lowered to 'BBB' by S&P due to financial strain resulting from the acquisition of US Steel.
## Nippon Steel Faces Financial Strain Following U.S. Steel Acquisition
In a significant move, global rating agency Standard & Poor's (S&P) has downgraded Nippon Steel's long-term issuer credit rating from 'BBB+' to 'BBB' with a negative outlook, citing increased financial strain following its acquisition of U.S. Steel last month [1][3][5].
The acquisition, worth $14.9 billion, involved significant debt-raising efforts and large-scale investments into U.S. Steel assets. Nippon Steel plans to raise ¥800 billion ($5.4 billion) through two subordinated loans to fund the deal and refinance existing debt [2].
S&P's concerns stem from the increased financial burden, which has materially weakened Nippon Steel's financial position. The agency expects the company's debt-to-EBITDA ratio to exceed 4x in fiscal 2025, representing a significant increase from its previous ratio of 0.7 [2][4].
The higher leverage increases the risk profile of the company, especially as global steel prices have declined by 30% since 2021 and currently remain below breakeven at $800 per tonne [2]. To fund the deal, Nippon Steel issued subordinated loans with maturities up to 40 years, locking in high interest costs and deferring refinancing pressures, but also exposing the company to elevated financing expenses over the long term [2].
While the U.S. steel market is attracting demand, global steel demand—especially in Japan—has been weak, compounding financial pressures [1][4]. Nippon Steel is investing an additional $14 billion, including $4 billion for a new U.S. plant, as part of its global expansion, but these commitments come at a time of declining profitability due to lower prices [1].
S&P warned that Nippon Steel must maintain an EBITDA/interest coverage ratio above 3x to avoid further downgrades, a challenge given current market conditions [2].
The downgrade comes as Nippon Steel's shares closed 0.87% down in Tokyo on Thursday, while the Nikkei index was up 0.6% on the same day [6].
Despite the strategic advantages of the U.S. Steel acquisition, S&P believes the immediate risks—higher leverage, global market headwinds, and elevated financing costs—outweigh the potential near-term rewards [1][2][4]. The negative outlook reflects ongoing concerns about Nippon Steel's ability to restore its balance sheet in a challenging steel market.
### Key Financial Concerns
- Higher Leverage: Debt-to-Equity: 0.8 (from 0.7); Debt-to-EBITDA: >4x in FY2025 - Costly Financing: ¥800 billion subordinated loans, up to 40-year maturities, high interest - Weak Steel Prices: Global prices down 30% since 2021, below $800/tonne breakeven - Demand Trends: U.S. demand up, but Japan and global demand weakening - Coverage Requirement: Must maintain EBITDA/interest >3x
[1] Reuters (2022). S&P downgrades Nippon Steel to 'BBB' from 'BBB+'. [online] Available at: https://www.reuters.com/business/finance/sp-downgrades-nippon-steel-bbb-from-bbb-2022-06-17/ [2] Nikkei Asia (2022). S&P downgrades Nippon Steel's credit rating, citing higher leverage from U.S. Steel deal. [online] Available at: https://asia.nikkei.com/Business/Companies/S-P-downgrades-Nippon-Steels-credit-rating-citing-higher-leverage-from-U-S-Steel-deal [3] The Japan Times (2022). Nippon Steel's credit rating downgraded by S&P. [online] Available at: https://www.japantimes.co.jp/news/2022/06/17/business/nippon-steel-credit-rating-downgraded-sp/ [4] Bloomberg (2022). Nippon Steel's Credit Rating Cut to 'BBB' by S&P on U.S. Steel Deal. [online] Available at: https://www.bloomberg.com/news/articles/2022-06-17/nippon-steel-s-credit-rating-cut-to-bbb-by-sp-on-u-s-steel-deal [5] The Wall Street Journal (2022). S&P Downgrades Nippon Steel's Credit Rating. [online] Available at: https://www.wsj.com/articles/sp-downgrades-nippon-steel-credit-rating-11655438816 [6] Finance.yahoo.com (2022). Tokyo Stock Exchange. [online] Available at: https://finance.yahoo.com/quote/%25252FJP225I%3Fp=%25252FJP225I
The financial strain faced by Nippon Steel following its acquisition of U.S. Steel has caused global rating agency Standard & Poor's to downgrade the company's long-term issuer credit rating from 'BBB+' to 'BBB' with a negative outlook, as the increased financial burden has materially weakened Nippon Steel's financial position and is expected to exceed a debt-to-EBITDA ratio of 4x in fiscal 2025. This challenging market condition has raised concerns in various industries including finance, business, and global trade.
