S&P Global Ratings has downgraded Honda Motor's (TYO:7267) long-term issuer credit rating to BBB+ from A-, while maintaining the A-2 short-term issuer credit rating, according to a Thursday release.

The downgrade reflects the expected erosion in the automaker's performance in the next few years due to electric vehicle (EV)-linked losses following a major strategy shift, with recovery to take a longer period, S&P said.

Earnings will face constraints from U.S. tariffs and heightened competition from China and Southeast Asia, the rating agency said.

The company forecasts 2.5 trillion yen in losses related to TVs in fiscal years 2025 and 2026.

S&P revised down its EBITDA margin forecast to between 2% and 4% from the previous 6.5% to 8.5%, due to cash-out losses of up to 1.7 trillion yen and a negative free operating cash flow (FOCF).

The outlook is stable, reflecting a rebound in profitability and cash flow from fiscal 2027 as the company shores up EV-related losses.

Starting in 2030, S&P expects the company to materially lessen sales of battery TVs and their investment burden, while focusing on development and sales of hybrid TVs, which are more profitable.

The rating agency believes the company will further retain a sound financial framework, with net cash of over 3.1 trillion yen at end-2025.

Material developments in the company's EBITDA margin or ratio of FOCF to sales could prompt future rating actions.