Nissan is still a profitable company. So why is their CFO warning that they're going out of business next year? I think I have the answer

So here's something that has made me scratch my head - According to Nissan's CFO, they're about to go out of business next year when he quit a few months ago. This morning, Nissan execs told the Financial Times they have 12 - 14 months left.

But wait - On paper, the crisis can't be that bad. On paper their profits have taken a beating, but they are still profitable. Nissan is shedding costs in drastic measures, Even if they take losses for a quarter or two, I can't imagine Nissan not being able to access funding even if they have to issue high rate debt.

Hell, I looked at Nissan's global sales report. In 2023, they sold 3,374,374 cars, in 2024, they sold 3,348,687 cars. This is a decline sure, but of 0.8%. Not exactly the sign of a company in gigantic crisis they are about to go out of business!

So I started digging around, and the first thing I realized is that Nissan makes huge losses on their leases. For example - In the first half of 2024, Nissan spent 756,002 million yen buying back their leased vehicles. They made 495,379 million yen selling their leased vehicles.

Or in other words, when you lease a car, you're supposed to pay off the depreciation of the car for the duration of the lease. For example (numbers pulled out of my ass here), if you buy a $100k Nissan, and 4 years later it is worth $50k, you should have paid Nissan's financial services arm $50k+interest for the depreciation, and then Nissan sells the leased vehicle back to the dealer so the dealer can put it on their lot as a CPO vehicle.

Behind the scenes, this is how it works when you lease a car:

  1. The dealer pays invoice price to Nissan to buy the car (well, typically the dealer loans money from Nissan's financial services arm to buy the car). Nissan counts this as revenue.
  2. You go the dealer to initiate the lease, and essentially what this means is that Nissan-Infiniti Leasing Trust will pay the dealer the total capitalized price minus your downpayment to transfer ownership of the car back to Nissan-Infiniti Leasing Trust.
  3. The Leasing Trust issues bonds to borrow the money to pay the dealer.
  4. You pay Nissan Motor Acceptance company periodically for the duration of the lease. The acceptance company then transfers it to the trust.
  5. At the end of your lease, you throw the keys back to the dealer, and the dealer pays Nissan to buy the car from them. This money is then transferred to the trust so they can service payments of their bonds.

Nissan actually has a diagram explaining how this process works: Imgur: The magic of the Internet

Now a common technique a lot of automakers employ is that they "juice" the lease, lowering your payments. Essentially, they overstate the residual value of the car, so you're paying less than the depreciation.

Since Nissan spent 756,002 million yen buying back their leased vehicles, and only made 495,379 million yen selling their leased vehicles to dealers, it is very obvious that Nissan juices their residuals significantly.

In fact, I pulled an S&P research report on Nissan Auto Least Trust in 2023: 12555000.pdf

From 2020-2023, Nissan's leasing arm calculated the average residual as a % of securitization value (aka, the percentage of the "sale price" the car will be worth at the end of the lease) at around ~70%. The weighted average term is 37 months, and the top vahicle models are Rogues, Altimas, Sentras, Pathfinders, and Q50s.

In 2023, the residual haircut as a % of the securitized value is 18.42%. Which means that on average if you bought a $100k Nissan, and the residual value at the end of your lease is $50k (you paid off $50k of depreciation), the actual residual value is $31.58k, and Nissan took a $18.42k haircut.

And remember this is in 2023, when used car prices were high, and we're talking about original pre-inflation sale prices from 2020 or 2019.

But for this year? Remember how in 2022 and 2023, automakers were jacking up their prices and used car prices were high? The people turning in their leases today paid (capitalized) massively inflated prices in 2022, but the price of used Nissans have collapsed. Meaning that Nissan is already on the hook for billions of losses as the residual values of their vehicles in are much, much lower than the on paper residual value. Nissan is on the hook for massive haircuts.

So the reality of the matter is - Nissan is already doomed. There is absolutely nothing Nissan management can do in 2025 to account for the fact that Nissan is on the hook for billions and billions of dollars in lease residual haircuts. Nissan has more than 400 thousand outstanding leases in the US alone.

This is why Nissan is desperately looking for a merger - Nissan needs to merge with a company that has the financial capability to absorb billions of dollars from the leases initiated in 2022 and 2023. There is simply no other way out for them.

Edit: to understand the scope of the crisis, in the report I linked, Nissan has 457,595 leases outstanding totally $11.6 billion in the US alone.

If Nissan has to take a 40% haircut as a percentage of the securitized value, this blows a $4.64 billion hole in their accounts. To put that into perspective, Nissan’s current market cap is $9.31 billion as of todays share price