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Research: Rating Action: Moody’s affirms NTT and NTT Finance’s A1 ratings; outlook stable

Tokyo, July 22, 2022 — Moody’s Japan K.K. has affirmed Nippon Telegraph and Telephone Corporation’s (NTT) A1 long-term issuer and senior secured ratings and P-1 commercial paper rating. Moody’s has also affirmed NTT’s Baseline Credit Assessment (BCA) of a2.

At the same time, Moody’s has also affirmed NTT FINANCE CORPORATION’s (NTT Finance) A1 long-term issuer and bond ratings.

The outlook on the ratings remains stable.

A full list of the affected ratings is provided at the end of this press release.

“NTT’s leverage metrics are on a moderating trend in line with what we had expected at the time of the company’s leveraged buyout of its wireless subsidiary, NTT DOCOMO, INC. (DOCOMO) in the fiscal year ended March 2021,” says Mariko Semetko, a Moody’s Vice President and Senior Credit Officer.

RATINGS RATIONALE

Recent strong earnings have moderated NTT’s debt/EBITDA to 3.0x as of fiscal year ended March 2022 from 3.2x the prior year, while retained cash flow/debt improved to 23.5% from 21.7% respectively. Moody’s includes securitization in its debt calculations.

Debt levels remain high since the buyout, but Moody’s expects a gradual reduction as NTT uses its free cash flow to pay down the debt over the next two years. NTT’s operating performance is very stable and predictable and consistently generates positive free cash flow.

NTT’s A1 issuer rating reflects a one-notch uplift from its BCA of a2. The a2 BCA is based on the company’s leading position in Japan’s telecommunications market; its advanced technological abilities; its ability to consistently generate positive free cash flow; and a benign competitive and regulatory framework.

At the same time, NTT’s BCA reflects its relatively high leverage; geographic concentration in Japan, with about 80% of its consolidated revenue from the domestic market; and moderate margin.

The Government of Japan (A1 stable) owns about one-third of NTT, making the company a government-related issuer under Moody’s Joint Default Analysis approach.

NTT Finance’s A1 issuer rating is on par with its parent NTT’s rating and reflects the exceptional integration with its parent’s operations and the integral finance functions it plays. A wholly-owned subsidiary of NTT, NTT Finance exists solely to serve as the finance and treasury division for its parent and has no material standalone external business, which is different from a typical captive finance company that provides sales financing to third parties.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The outlook on NTT’s ratings is stable, reflecting Moody’s expectation that NTT will retain its leading position in its core markets, and that the competitive pressure to lower wireless rates at DOCOMO will not significantly reduce NTT’s earnings and cash flow. The outlook also incorporates the company’s publicly stated plan to continue reducing its buy-out related debt.

The stable outlook on NTT Finance’s ratings mirrors the stable outlook on NTT’s ratings.

An upgrade of the company’s A1 issuer rating is unlikely because the rating is on par with the sovereign’s rating. An upgrade of the BCA is also unlikely until NTT’s leverage returns to pre-buyout levels, including debt/EBITDA around 2x and retained cash flow/debt around 35%.

Moody’s could downgrade NTT’s BCA if business risks increase, including from an unfavorable competitive or regulatory environment. The BCA and stable outlook would come under pressure over the next 12 to 18 months if the company does not steadily reduce debt, so that debt/EBITDA is brought sustainably below 3.0x and retained cash flow/debt continues to improve toward 25%.

Moody’s could upgrade NTT Finance’s rating if NTT’s ratings are upgraded, or downgrade NTT Finance’s rating if NTT’s ratings are downgraded. Moody’s may also consider notching down NTT Finance’s issuer rating compared with NTT’s issuer rating if the business model, likelihood of support, access to cash flow, or Moody’s view of the companies’ strong integration changes.

The principal methodologies used in rating Nippon Telegraph and Telephone Corporation were Telecommunications Service Providers (Japanese) published in April 2017 and available at https://ratings.moodys.com/api/rmc-documents/357583, and Government-Related Issuers Methodology (Japanese) published in February 2020 and available at https://ratings.moodys.com/api/rmc-documents/66606. The principal methodology used in rating NTT FINANCE CORPORATION was Telecommunications Service Providers (Japanese) published in April 2017 and available at https://ratings.moodys.com/api/rmc-documents/357583. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of these methodologies.

Nippon Telegraph and Telephone Corporation, headquartered in Tokyo, is the leading integrated telecommunications operator in Japan. Japan’s Ministry of Finance owns about one-third of NTT, and the company governed by the NTT Law.

LIST OF AFFECTED RATINGS

Issuer: Nippon Telegraph and Telephone Corporation

…Long-term Issuer Rating, Affirmed A1

…Long-term Issuer Rating (Local Currency), Affirmed A1

…Senior Secured Regular Bond/Debenture (Local Currency), Affirmed A1

…Commercial Paper (Local Currency), Affirmed P-1

…Baseline Credit Assessment (BCA), Affirmed a2

…Outlook, Remains stable

Issuer: NTT FINANCE CORPORATION

…Long-term Issuer Rating (Local and Foreign Currency), Affirmed A1

…Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1

…Backed Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1

…Outlook, Remains stable

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

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

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Mariko Semetko
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Mihoko Manabe
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

Releasing Office:
Moody’s Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo, 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100

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