OREANDA-NEWS. S&P Global Ratings today said it has maintained its 'BB-' long-term corporate credit rating on Japan-based automaker Mitsubishi Motors Corp. on CreditWatch with negative implications based on its view that the company's business operations and performance will remain under downward pressure because of its fuel-consumption data falsification. We placed the rating on CreditWatch on April 22, 2016, when the company revealed it has falsified fuel-consumption test data. We kept the rating on CreditWatch when we lowered it two notches on May 16, 2016, to reflect our view of serious deficiencies in the company's risk management regime and internal governance.

The company's 2016 April-June quarter results, announced July 27, 2016, included ?4.6 billion of consolidated operating profit, down 75% year on year. Overseas, where the company generates 90% of its sales, it made a profit, supported by strong sales in North America. In the domestic market, however, the company made a loss, affected by suspension of production and sales of four models of mini-vehicles as a result of data falsification as well as higher costs for measures to improve product quality. In these circumstances, the company's EBITDA margin is likely to fall to about 5% in fiscal 2016, from about 8%-9% in the last several fiscal years, in our view. Given the company's declining competitiveness in the Japanese market and a rise in the yen, we believe Mitsubishi Motors' profitability is unlikely to recover rapidly or materially. These factors lead us to lower our assessment of the company's business risk profile to weak from fair.

We have maintained our assessment of the company's financial risk profile as modest because the company maintains a low debt balance and sufficient cash and deposits at hand. Our assessment also incorporates Mitsubishi Motors' strong ties to financial institutions. But at the same time we cannot rule out the possibility that utilization rates at domestic factories will remain low for a prolonged period or that unit sales will decrease in major Southeast Asian and other overseas markets. We may lower our assessment of the company's financial risk profile if we see a higher likelihood of its operating cash flow and free cash flow decreasing further, potentially as a result of increased compensation payments and other expenses related to data falsification or a delay in an alliance with, or a capital injection by, Nissan.

We intend to resolve the CreditWatch within three months, after examining the progress of a capital and business alliance with Nissan, trends in auto sales in Japan and abroad, and forecasts for operating results, working capital, and operating cash flow for fiscal 2016. We may consider a downgrade if we form a stronger view that the company's profitability and free cash flow will deteriorate materially or it will face a significant problem with liquidity. This would happen if weakened brand recognition and social credibility were to lower the company's competitiveness in its main Southeast Asian market, materially decreasing unit sales; if expenses related to the data falsification exceed our assumptions; or if the alliance with Nissan Motor does not progress as planned.

The third-party committee report released Aug. 2, 2016, included no finding verifying the involvement of top management in the data falsification. Accordingly, we see no need to further lower our assessment of Mitsubishi Motor's companywide risk management and internal governance at this point. However, we will examine company efforts to prevent a recurrence of such an incident as a part of our analysis in the process of removing the rating from CreditWatch.