US-based credit ratings agency S&P Global Ratings has announced that it has downgraded Japanese steelmaker Nippon Steel’s credit rating from “BBB+” to “BBB” and revised its outlook to negative, signaling rising concerns over the financial impact of its $14.1 billion acquisition of US Steel. The move reflects expectations that the Japanese steelmaker’s leverage will rise significantly, and financial recovery may be delayed.
Higher leverage post-US Steel deal
S&P projects Nippon Steel’s debt-to-EBITDA ratio to exceed 4x in the financial year 2025-26, compared to just 1.6x in the financial year 2024-25. The primary driver of this sharp increase is the company’s acquisition of US Steel and the additional burden of $11 billion investment commitments by 2028 under the National Security Agreement (NSA), continued capital expenditures, and integration costs related to US Steel’s less efficient operations.
Subordinated loans with partial equity treatment will offer some relief, but S&P believes recovery in core financial metrics will remain slow.
Strong bank support but EBITDA under pressure
Despite these challenges, Nippon Steel is expected to maintain access to low-cost financing and strong relationships with financial institutions. Still, Nippon Steel’s EBITDA is projected to recover only gradually due to subdued steel demand both in Japan and globally, as well as the indirect effects of US steel tariffs. Excluding US Steel, Nippon Steel’s EBITDA for the fiscal year 2025-26 is expected to decline by around 20 percent from the previous year’s figure of over JPY 1 trillion ($6.78 billion).
Global positioning intact, but earnings may wobble
Nippon Steel’s strength in high-grade steel and automotive steel products continues to support its global positioning. However, S&P notes that earnings stability may deteriorate as the company absorbs US Steel’s performance swings.
Meanwhile, US Steel is expected to retain a strong customer base, including automakers, though its reliance on flat rolled products exposes it to intense price competition. Nippon Steel’s planned investments may enhance product quality and competitiveness over time, but immediate gains are uncertain. Despite US Steel’s high fixed costs and earnings volatility due to aging facilities, the acquisition is not expected to destabilize Nippon Steel’s earnings in the near term. US import tariffs should provide more support than initially anticipated, and the recent startup of a mini mill is also expected to boost US Steel’s profitability.
What the negative outlook means
The negative outlook reflects the risk that Nippon Steel may fail to bring leverage below 4x within the next 12 months. If financial metrics do not improve, S&P may issue a further downgrade. However, S&P could revise the outlook to stable if Nippon Steel significantly boosts earnings and the company successfully sells assets or raises new capital to reduce debt.