RPT-Fitch Affirms Honda at 'A'; Outlook Stable
May 8 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Japan-based Honda Motor's (Honda) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A' and its Short-Term Foreign and Local Currency IDRs at 'F1' respectively. The Outlook is Stable.
The agency has also affirmed its US subsidiary American Honda Finance Corporation's (AHFC) Short-Term Foreign Currency IDR at 'F1'. A full rating breakdown is provided below.
Key Rating Drivers
Production normalise in FY13: Honda's operations improved markedly in FY13 (year-end March) as automobile production was ramped up following the March 2011 earthquake and the Thai floods in H211. As a result, the automobile division swung back to an operating profit of JPY286bn from an operating loss a year ago. Despite a slight decline in profit in the motorcycle division, the company more than doubled its overall operating profit of JPY544.8bn on a year-on-year basis.
Operating environment remains benign: Globally, Fitch expects global auto sales and production to rise in the low- to mid-single digit range in 2013, propelled by ongoing demand strength in the U.S. and, to a lesser extent, in emerging markets. China sales for Japanese automakers including Honda remain below pre Sino-Japanese tension levels but are showing improvement. Production for Honda is now almost back to normal. US market share has been on an upward trend in the past couple of months with ongoing brisk sales of the Accord, which was introduced in the fall of 2012. In April, Honda's market share was at 10.2%, after a dip in early 2013.
Continued improvement in operations: Fitch expects Honda to continue to post robust earnings with modest sales volume growth amid a weaker yen. However, growth is likely to be tempered by higher costs such as in marketing, depreciation and R&D. Capex is also likely to increase with increased investment and also with the weaker yen but Fitch expects the company to return to positive cash flow generation from FY14 onwards after two years of negative free cash flow.
Weak yen: The recent depreciation of the yen against the US dollar is likely to boost Honda's profitability. Nevertheless, Fitch believes the company's ongoing efforts to boost overseas production and reduce FX exposure is not likely to change in the medium term. Fitch expects the company to boost its overseas production capacity over the next two to three years and reduce the proportion of Japanese production.
AHFC's ratings linked to Honda's: The rating link reflects Fitch's view of AHFC being core to Honda's overall franchise, and their strong business and financial linkages. Its debt ratings are supported by inter-company funding and a keep-well agreement provided by Honda. A change in the perceived relationship between Honda and AHFC, or deterioration in Honda's financial performance or credit profile could affect AHFC's ratings and Rating Outlook.
Improvement in operations: AHFC's operating performance improved for the nine months to December 2012, benefitting from lower cost of funding and continued strength in used vehicle residual values. Fitch believes operating performance for the full year to be stable, barring significant increases in funding or provisioning due to deteriorating economic trends. Fitch expects Honda's vehicle sales in the U.S. will grow modestly in the near-term.
Diversified funding profile, sufficient liquidity: AHFC's funding profile is diversified and consistent with its current ratings. Fitch believes AHFC has sufficient liquidity under its bank facilities, medium-term note programmes and commercial paper facilities to meet near-term funding needs and maturing debt obligations in 2013. AHFC's capitalisation and leverage are consistent with that of similarly rated peers. Fitch believes Honda will provide capital contributions to AFHC as and when necessary to comply with its keep-well agreement.
Negative: Future developments that may, individually or collectively, lead to negative rating action include-
-Market share erosion in key markets
-Substantial deterioration in global auto demand
-Sustained negative free cash flow
Positive: Future developments that may, individually or collectively, lead to positive rating action include-
-Market share gains in key markets
-Increased market presence in the premium auto segment
Long-Term Foreign and Local Currency IDRs affirmed at 'A'; Outlook Stable
Short-Term Foreign and Local Currency IDRs affirmed at 'F1'
Senior unsecured debt rating affirmed at 'A'
Short-Term Foreign Currency IDR affirmed at 'F1'
Commercial paper affirmed at 'F1'
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