(The following statement was released by the rating agency)
Nov 30 -
Summary analysis -- Toyota Motor Corp. ---------------------------- 30-Nov-2012
CREDIT RATING: AA-/Negative/A-1+ Country: Japan
Primary SIC: Motor Vehicles
Mult. CUSIP6: 892331
Credit Rating History:
Local currency Foreign currency
04-Mar-2011 AA-/A-1+ AA-/A-1+
08-May-2009 AA/A-1+ AA/A-1+
06-Feb-2009 AA+/A-1+ AA+/A-1+
The ratings on Japan-based Toyota Motor Corp. (AA-/Negative/A-1+) reflect the company’s “strong” business profile. We base this assessment on the company’s strong market position, with extensive geographic and product diversity; “minimal” financial risk profile; technological leadership; and close relationships with highly competitive and financially strong Toyota group suppliers. Partially offsetting these strengths are weak profitability--due to record highs for the yen--and intense competition in the global auto industry. The ratings also reflect our view that the company has a “minimal” financial risk profile, supported by its very strong capital structure and “exceptional” liquidity.
Toyota Motor faced another tough year in fiscal 2011 (ended March 31, 2012), hit by supply disruptions and production cuts following the Great East Japan Earthquake in March 2011. However, the company sold 7.35 million units worldwide as a strong rebound in the second half of the year drove a recovery in production and inventory levels. Inventory levels returned to normal around March 2012, and the recovery in sales has accelerated in fiscal 2012. Revenues from nonfinancial services rebounded nearly 40% during the first half of fiscal 2012 from same period a year earlier, reflecting strong growth in unit sales across regions. In our opinion, Toyota Motor’s competitiveness remains strong, and we expect the company to continue to regain lost market share in the U.S. and other key markets.
The backlash against Japan in China over a territorial dispute between the nations cut sales at Japanese automakers significantly from September 2012. Toyota Motor’s sales for October plunged 44% year on year, while sales at Honda Motor Co. Ltd. (A+/Stable/A-1) and Nissan Motor Co. Ltd. (BBB+/Stable/A-2) fell 54% and 41%, respectively. Our base case scenario for Toyota Motor does not currently anticipate we would change the ratings on the basis of the China issue alone, because we assume strong performance in North America and Southeast Asia will likely at least partially offset weaker earnings results from China. We also believe Toyota Motor’s strong financial standing provides sufficient headroom for the ratings. Nevertheless, if the serious downturn in the company’s sales continues for a protracted period well into 2013 and possibly beyond, Toyota Motor would not only suffer greater pressure on profitability but may also experience irreversible erosion of its position in the world’s largest vehicle market.
We expect Toyota Motor’s profitability to improve from a weak level in fiscal 2011 because operations have recovered from supply disruptions in 2011. Furthermore, the company’s proven ability to consistently reduce costs should help it improve profitability. In recent years, Toyota Motor has consistently cut about JPY300 billion in costs annually. Moreover, it is taking extra measures to reduce exposure to the strong yen, such as increasing local content in vehicles produced overseas and expanding imports of components for vehicles produced in Japan. In our base case scenario, we expect Toyota Motor’s nonfinancial service operations to produce an operating margin of about 5% and an EBITDA margin of about 10% by fiscal 2013. Nevertheless, we see overproduction in Japan--with many vehicles destined for overseas markets--as a weakness that could prevent Toyota Motor from making the continuous improvements in profitability that we expect in the event that the yen becomes even stronger.
We view Toyota Motor’s financial risk profile to be “minimal” because of the company’s very strong capital structure and exceptional liquidity. We expect the company’s nonfinancial service operations to generate significant positive free operating cash flow in fiscal 2012, with more stable operations producing strong cash flow generation and moderate capital expenditure. Despite difficult business conditions and the strong yen, we expect measures of the company’s credit quality to remain very strong over the next two years, with ratios of its funds from operations (FFO) to debt of significantly over 100% and debt to EBITDA of under 1.0x on a fully adjusted basis. Toyota Motor has accumulated historically high levels of surplus cash over the past two years and its nonfinancial service operations have virtually no debt and have net cash positions. We believe Toyota Motor’s very strong capital structure and “exceptional” liquidity should help it maintain its “minimal” financial risk profile in the future.
“Exceptional” liquidity underpins the ‘AA-’ long-term rating on Toyota Motor. We believe that the company’s sources of liquidity will easily exceed 2x uses over the next two years. As of Sept. 30, 2012, on a consolidated basis, Toyota Motor had JPY1.8 trillion in cash and cash equivalents. Moreover, Toyota Motor holds large investments in highly rated government securities, such as Japanese government bonds and U.S. Treasury bonds, and it classifies these as both current assets and investments. We view these as high-quality financial assets further supporting Toyota Motor’s liquidity. As of Sept. 30, 2012, Toyota Motor had JPY5 trillion in total cash and securities on a consolidated basis, significantly exceeding JPY2.1 trillion in long-term debt due to mature within a year. We believe Toyota Motor maintains a massive net cash position in its nonfinancial service operations. In addition, as of March 31, 2012, the company had JPY7.6 trillion in long-term unused lines of credit, and it maintains strong relationships with major Japanese banking groups. Short-term assets in Toyota Motor’s captive finance operations adequately match short-term debts.
The negative outlook reflects Standard & Poor’s view that Toyota Motor’s overproduction in Japan has the potential to set back a recovery in its earnings. Although we expect Toyota Motor to gradually become less vulnerable to a strong yen as it increases local content in vehicles made overseas and raises imports of components for vehicles made in Japan, large production capacity in Japan may slow a recovery if the yen rises further.
We may lower the ratings if we conclude that Toyota Motor’s nonfinancial service operations are unlikely to continue their improvement or produce an operating margin of about 5% and an EBITDA margin of about 10% on a sustainable basis.
At the same time, we may revise the outlook to stable if we believe the company is likely to significantly accelerate the recovery in its profitability through effective measures to increase its resilience to the strong yen or rapidly expand sales in major vehicle markets. However, the challenges the company faces, including intense competition and the strong yen, lead us to view an upward outlook revision as not very likely in the next 12 months.