DBRS Confirms Honda – Changes Trend to Stable

DBRS has today confirmed the ratings of Honda Motor Co., Ltd. (Honda or the Company). The commercial paper ratings remain at R-1 (middle) with a Stable trend. DBRS has, however, changed the trend of the long-term ratings from Positive to Stable. The trend change reflects the sharply deteriorating market conditions worldwide that have significantly reduced the Company’s earnings prospects over the near to medium term. The ratings confirmation in turn incorporates Honda’s ongoing strong business profile, with its core models very well positioned to benefit from the structural shift in consumer preference toward more fuel-efficient vehicles. The Company’s financial profile also continues to be very solid, as shown by a significant net cash position of the automotive operations and a historically conservative financial policy.

Honda recently announced a revised profit outlook for fiscal 2009 (ending March 31, 2009) that follows an earlier profit warning issued in late October. The Company now expects annual revenues of 10.4 trillion yen and operating income of 180 billion yen, representing decreases from fiscal 2008 levels of 13% and 81% respectively. The consecutive downward profit guidances are a function of weak automotive markets that prevailed during the first half this year, but which have become much worse in recent months. Honda’s unit sales in its core United States market through the first nine months of calendar 2008 were down only 1% year-over-year, which represented a relatively strong performance vis-à-vis an industry sales decline of approximately 13%. However, more recently, sales have been more in line with industry levels, with the Company’s monthly unit sales in October and November falling precipitously by 25% and 32% respectively year-over-year.

The dramatic U.S. sales declines the past two months reflect severe market conditions as aggregate demand has contracted sharply from already poor levels given restricted access to credit and much lower consumer confidence. These factors have also led to significant sales decreases in Europe and Honda’s native Japanese market, as the American economic crisis has proliferated globally. Emerging automotive markets, which previously were expected to represent an important source of growth for the Company over the medium term, have been adversely impacted as well.

In response to the weakening demand, Honda is reducing activity across its major plants in the United States, Japan and Europe, with recently announced production cuts exceeding 200 thousand units. Furthermore, the Company has halved its projected dividend for the quarter ending December 31, 2008, with decisions regarding subsequent dividend payments suspended indefinitely. Additional cost-cutting efforts include the Company’s decision to exit the Formula One racing circuit as well as the cancellation of the development of the next generation NSX sports car.

Honda’s results and outlook are also negatively affected by the strengthening of the yen. While the U.S. production capacity exceeds 80% of national sales, the foreign exchange exposure remains significant, particularly with the yen recently reaching a level below 90 to the U.S. dollar. The Company expects the yen to appreciate relative to other major currencies over the medium term as well.

Notwithstanding the weak markets and significant currency headwinds, Honda’s business profile remains strong. The Company’s four core models (Civic, Accord, Fit & CRV) represent more than 75% of global unit sales and are very well positioned in light of the structural shift worldwide toward smaller, more fuel-efficient vehicles (increasingly spurred by the global economic crisis and tighter environmental legislation in developed markets). Additionally, the new Insight hybrid model will be launched next year; this will be followed by a CRZ hybrid sports car to be introduced in 2010. Furthermore, despite the lower near-term growth prospects of emerging markets, continuing expansion into countries such as China and Brazil should eventually alleviate Honda’s dependence on the United States.

The Company’s financial profile remains very strong and commensurate with the assigned ratings. As of September 30, 2008, the automotive operations had a significant net cash position of approximately 438 billion yen. The finance operations also have a very solid liquidity position through diversified funding programs.

Honda should prove resilient through the sharp downturn in the automotive industry relative to many of its peers. While the severe market conditions will likely result in significantly lower margins (relative to historical levels) over the near to medium term, the ratings are expected to remain stable so long as the Company’s strong competitive position and financial profile are maintained. However, negative ratings implications would result if Honda were to incur significant losses and cash burn in the forthcoming periods.

Notes:
All figures are in Japanese yen unless otherwise noted.
The applicable methodology is Rating Automotive, which can be found on our web site under Methodologies.
This is a Corporate (Autos and Auto Parts) rating.
Honda Canada Finance Inc. is supported by Honda Motor Co., Ltd.