IOTW: Kioxia — Credit Rating Upgraded to Investment Grade, NAND Amid the AI Wave

Chart 1: Market Share of NAND Flash Memory      

In July 2025, Kioxia successfully completed its inaugural U.S. dollar bond issuance, raising approximately US$3 billion in total and marking the company’s formal entry into the international capital markets. Less than a year later, in May 2026, S&P and Fitch simultaneously upgraded Kioxia’s credit rating to BBB-, crossing the investment-grade threshold—an important milestone that attracted significant market attention. Against a backdrop of continued Capex expansion, does this rating upgrade indicate that Kioxia’s credit fundamentals are now sufficiently robust? This article examines the company’s business performance and credit profile in detail.

AI Wave Drives Record Performance

Kioxia delivered strong results in fiscal year 2025. Total revenue grew 37% YoY to ¥2,337.6 billion. Gross profit reached ¥1,103.2 billion, with the gross margin improving sharply to 47%. Operating profit nearly doubled to ¥876.2 billion (see Chart 2). The primary driver of the improvement was surging demand for enterprise SSDs from AI data center customers, which significantly lifted average selling prices (ASP). In the fourth quarter of fiscal year 2025 alone, ASP rose 100%.

Chart 2: Kioxia’s Total Revenue and Operating Profit

By business segment, revenue from SSD & Storage Devices increased by ¥371.5 billion YoY to ¥1,362.6 billion, accounting for approximately 58% of total annual revenue and remaining the largest segment (see Chart 3). Smart Devices revenue also rose by ¥258.8 billion to ¥760.0 billion, mainly supported by smartphone manufacturers actively stocking up amid memory shortages. Geographically, the United States was the largest revenue source, contributing about 47% of annual revenue and growing more than 40% YoY. China and Taiwan accounted for roughly 16% and 13%, respectively. Major customers include Apple (21%) and Dell (9%), indicating that the revenue base is shifting toward higher-credit-quality clients and supporting cash-flow stability.

Chart 3: Kioxia’s Revenue Breakdown by Business

NAND Supply Shortage and Strong Pricing Power Reflected in First-Quarter Results

According to IDC data, global NAND supply growth in 2026 is expected to be only around 17%, compared with demand growth of 20–22%, resulting in a 4–5% supply gap. Kioxia’s management has stated that the company’s full-year 2026 NAND capacity is already sold out and expects the supply shortage to continue through 2027–2028, supporting continued strong pricing power. This is clearly reflected in the first quarter of fiscal year 2026, which recorded a 72% operating margin. Total revenue surged 416% YoY to ¥1,767.1 billion, while operating profit jumped 2,700% to ¥1,270.0 billion (see Table 1). Notably, the company is gradually shifting enterprise SSD sales from spot pricing toward multi-year long-term agreements (LTAs) with data centre customers, targeting coverage of about 50% of sales by 2028. This should improve revenue visibility while reducing cyclical volatility in the memory business.

Table 1: Kioxia FY2026 Q1 Result

Extension of Joint Venture with Sandisk Strengthens Revenue Visibility

On the business development front, Kioxia and Sandisk jointly invest in and operate wafer fabs in Yokkaichi and Kitakami, Japan. The partners share the substantial construction costs and the resulting NAND chip output on a pro-rata basis, with each selling independently. This collaboration has lasted more than 25 years. In January 2026 the companies announced an extension of the joint venture agreement through 2034, meaning Sandisk will continue to share future Capex and thereby ease Kioxia’s funding pressure.

In addition, because Kioxia is the actual operator of the fabs, Sandisk will make staged payments totaling US$1.17 billion in manufacturing service fees to Kioxia between 2026 and 2029. The parties have also changed the previous fee arrangement to a “manufacturing service compensation” model, which is expected to contribute approximately ¥20 billion in additional operating profit annually for about nine years, providing Kioxia with a stable cash-flow stream.

Disciplined Capital Investment and Record Free Cash Flow

To meet AI memory demand, Kioxia plans to invest an average of approximately ¥470 billion in Capex annually from fiscal year 2026 to 2028 (with fiscal year 2026 expected at ¥450 billion). This represents a substantial increase of about 66% compared with fiscal year 2025 spending and is mainly directed toward ramping up production of 10th-generation BiCS FLASH and expanding the Kitakami fab (see Chart 4).

Chart 4: Kioxia’s Free Cash Flow

Despite the sharp rise in Capex, Kioxia still generated a record ¥332.8 billion in free cash flow in fiscal year 2025, up 56% YoY. This demonstrates that the company has significantly strengthened its cash-generation capability even while expanding. Management has also committed to keeping free cash flow positive throughout the period of large-scale investment, thereby providing ample buffer for debt repayment.

In the first quarter of fiscal year 2026, management-maintained investment discipline, with Capex of only ¥52.4 billion—just 12% of the full-year expectation. Combined with strong operating cash flow, Kioxia recorded a new high of ¥813.9 billion in free cash flow, already exceeding the full-year figure for fiscal year 2025 and providing substantial debt-repayment capacity.

Significant Improvement in Debt Levels and Upgrade to Investment Grade

As of the first quarter of fiscal year 2026, strong earnings performance lifted cash and cash equivalents to ¥791.0 billion (see Chart 5). During the same quarter the company used cash to prepay ¥407.5 billion of long-term debt, reducing total debt to ¥634.6 billion. The net debt-to-equity ratio improved from 41% at the end of fiscal year 2025 to a net cash position. This reflects management’s disciplined use of cash and its decision not to neglect debt buffers in favor of Capex or shareholder returns.

Chart 5: Kioxia’s Debt Levels

In May 2026, S&P and Fitch simultaneously raised Kioxia’s credit rating from BB+ to BBB-, formally crossing the investment-grade threshold. This not only lowers the company’s financing costs but also opens the door for institutional investors restricted to investment-grade bonds, thereby broadening the potential investor base. Should Kioxia need external financing in the future, the difficulty of raising funds is expected to decrease substantially.

Bond Investment

Overall, Kioxia’s solid repayment capacity is underpinned by robust demand for NAND memory from AI data centres and strong cash flow generation. Two U.S. dollar bonds issued by Kioxia are currently available on the platform. Both the issuer and the bonds carry BBB- / BBB- ratings from S&P and Fitch, placing them in the investment-grade category (see Table 2). Relative to issuers of the same rating, Kioxia’s bonds offer attractive yields to maturity (see Chart 6). These bonds are suitable for investors seeking stable cash flows who also wish to increase exposure to the AI sector.

Chart 6: Kioxia Bond Yields Compared with Same-Rated Issuers

Table 2: Kioxia Bonds

Corporate Risks

Although Kioxia’s business outlook has improved markedly, investors should still pay attention to the following key risks.

First is the cyclical nature of the NAND industry. The NAND flash memory sector has historically been highly cyclical, with repeated episodes of oversupply that caused sharp declines in average selling prices and left manufacturers in loss-making positions. The company’s current strong results are largely predicated on rising prices. Should AI infrastructure investment slow or competitors such as Samsung and SK Hynix ramp up production aggressively, the supply-demand balance could reverse quickly, significantly impacting Kioxia’s revenue and free cash flow.

Second is Capex pressure. The company plans to invest an average of approximately ¥470 billion annually in Capex from fiscal year 2026 to 2028—a substantial increase from previous levels. If the NAND price cycle turns downward, free cash flow could rapidly shift from positive to negative, increasing financial strain. It is worth noting that BBB- is the lowest notch within the investment-grade category, leaving limited buffer. Should profitability weaken, a downgrade back to high-yield status cannot be ruled out.

Third are geopolitical and policy risks. Against the backdrop of U.S.–China technology decoupling, Japan’s semiconductor export control policies and potential supply-chain restrictions could affect Kioxia’s manufacturing costs and market access. In addition, the company’s wafer fabs are highly concentrated in Japan, so natural disasters or energy supply disruptions could impact production capacity.

Finally, there is duration risk. The two U.S. dollar bonds have remaining tenors of approximately 4.1 years and 7.1 years, respectively, and are therefore sensitive to interest-rate movements. If U.S. Treasury yields rise, bond prices will face downward pressure. Investors should monitor the potential impact of interest-rate risk on portfolio valuations.

Conclusion

Benefiting from strong demand for high-capacity SSDs from AI data centers, Kioxia’s total revenue for fiscal year 2025 rose 37% YoY to ¥2,337.6 billion. Operating profit nearly doubled. Management expects the NAND supply shortage to persist through 2027–2028, providing solid support for the company’s pricing power.

As of the first quarter of fiscal year 2026, Kioxia’s cash and cash equivalents increased substantially to ¥791.0 billion. The net debt-to-equity ratio improved sharply from 41% at the end of fiscal year 2025 to a net cash position, reflecting the company’s healthy debt levels.

Two U.S. dollar bonds issued by Kioxia are currently available on the platform, offering net yields to maturity of 5.25% and 5.75%, respectively. Compared with peers of the same rating, Kioxia’s bonds offer a degree of yield attractiveness.