DBRS Downgrades Toyota Motor Corporation, Trend Remains Negative

DBRS has today downgraded the long-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries to AA from AAA. The trend on the long-term ratings remains Negative, reflective of major headwinds facing the Company, including declining market sales in most major markets as well as adverse currency effects given the relative strengthening of the yen. The short-term ratings have also been downgraded to R-1 (middle) from R-1 (high); however, the trend on the short-term ratings is Stable as the Company’s liquidity position continues to be abundant. The rating actions are a function of the following factors:

-- The global financial crisis and challenging automotive industry conditions have negatively affected Toyota’s operating performance (including its forecasted results for fiscal 2010) to a degree that has significantly exceeded DBRS’s expectations.

-- The recovery of Toyota’s earnings is now expected to occur later than originally anticipated, based on the Company’s recently announced forecast for fiscal 2010 (ending March 31, 2010) that is projected to be significantly worse than the already weak fiscal 2009 results.

-- The negative operating results extending through the forthcoming fiscal year will continue to adversely impact Toyota’s financial profile. As of March 31, 2009, the net cash position of the industrial operations stood at approximately 351 billion yen, which is roughly one-half of the 699 billion yen net cash position reported one year earlier. While the Company still has sizeable additional liquid assets and liquidity remains abundant, DBRS notes that Toyota’s financial profile is migrating to a level that no longer supports its formerly assigned AAA long-term ratings.

DBRS notes that Toyota recently announced fiscal 2009 (ending March 31, 2009) results that were below company forecasts and DBRS’s expectations. Total revenues dropped by 22% year-over-year to 20.5 trillion yen. Despite cost-cutting efforts initiated by the Company, the substantial decline in revenues resulted in Toyota reporting an operating loss of 461 billion yen; the first annual loss for the Company in more than fifty years.

Toyota has been adversely impacted by the structural decline of its native Japanese market, where industry sales have been decreasing for several consecutive years given unfavourable demographic trends. Additionally, Europe was negatively affected by the global financial crisis, which contributed to Toyota’s unit sales dropping 17% year-over-year in the region. In North America, Toyota’s core market, unit sales decreased by an alarming 25% year-over-year. The sales declines in the Company’s major markets have been exacerbated by Toyota’s recent expansion investments that have increased its cost structure amid sharply lower volumes; this has put additional pressure on margins.

In addition to the sudden drop in volumes, Toyota’s performance has also been negatively affected by the stronger yen, as Japan continues to represent the majority of its production base, (with 60% of total unit production being sourced from Japan in fiscal 2009). Through fiscal 2009, the yen appreciated considerably relative to the euro and the U.S. dollar, with foreign exchange effects negatively impacting operating performance in the amount of approximately 760 billion yen.

Notwithstanding the weak markets and significant currency headwinds, Toyota’s business profile remains solid. Despite the recent drop in sales, DBRS notes that Toyota has fared well relative to its competitors, with the Company maintaining or increasing share in 2008 in all significant markets with the exception of Europe. The Company remains among the most efficient of automotive OEMs with a strong product line and an envied reputation for quality. Additionally, the Company’s hybrid technology has generated favourable publicity and remains very well positioned in light of the global trend toward more fuel-efficient vehicles driven by volatile fuel prices and tightening emissions regulations across major markets.

Toyota’s financial profile remains strong, with the industrial operations having a significant net cash position of approximately 350 billion yen as of March 31, 2009. The Company’s formidable balance sheet enables it to withstand the severe market conditions, with Toyota able to sustain important development programs that should increase the competitiveness of its product portfolio going forward.

However, the trend on the long-term ratings remains Negative as the very weak market conditions are expected to prevail over the near term. For the forthcoming fiscal year, the Company has forecast a further significant drop in sales across all major markets. Toyota has initiated several cost-cutting measures in an effort to minimize its losses. Examples include: production adjustments; reduction of overhead expenses; and the revision or cancellation of new plant projects. DBRS also expects the Company to moderate its shareholder initiatives to help defend its stellar financial profile. Despite these actions, the operating loss for fiscal 2010 is currently projected at 850 billion yen. The forecasted losses incorporate currency headwinds that are expected to persist as Toyota’s reliance on exports from its Japanese manufacturing base will continue to pressure margins. Despite the Negative trend, DBRS notes that further negative rating actions are only likely if the Company’s market performance is weak relative to its peers or if Toyota’s future cash burn proves so severe that its financial profile is materially adversely impacted.

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 & Auto Parts) rating.