May 8 (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
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
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'