DBRS Downgrades Toyota Motor Corporation to AA (low), Trend Negative

DBRS has today downgraded the long-term ratings of Toyota Motor Corporation (Toyota or the Company) and its subsidiaries to AA (low) from AA. The trend on the long-term ratings remains Negative. DBRS has also discontinued the Issuer Rating of Toyota Kreditbank GmbH at the request of the Issuer.

Today’s downgrade reflects the following issues confronting the Company:
-- Toyota’s sustained lower profitability that, in the opinion of DBRS, will likely persist for the foreseeable future;
-- Foreign exchange headwinds (i.e., Japanese yen to U.S. dollar exchange rate) that, further taking into account the projected ongoing weakness of the U.S. dollar, represent a structural shift further undermining the Company’s earnings recovery;
-- Continuing loss of share in the important U.S. market (see below); and
-- Challenges associated with restoring the Company’s vaunted reputations for quality, safety and reliability that have been adversely impacted by its extensive vehicle recalls.

The above factors have been exacerbated by the Great East Japan Earthquake (the Earthquake), which has resulted in significant disruptions in vehicle production and sales that will likely persist for several more months. The Negative trend on the long-term ratings incorporates the expectation that Toyota’s further recovery could therefore prove quite protracted. However, with respect to Toyota’s short-term ratings, these remain unchanged at R-1 (middle) with a Stable trend as the Company’s liquidity position continues to be abundant.

Toyota recently released its 2011 fiscal year (F2011, ending March 31, 2011) results, which, although higher year-over-year, remain substantially below historical norms. Toyota did not announce its outlook for F2012 until it can more fully ascertain the effects of the Earthquake. However, DBRS notes that in terms of foreign exchange headwinds and Japanese production, Toyota is significantly more exposed than its Japanese peers in this regard, with Japan representing approximately 40% of the Company’s (Toyota and Lexus brand) automotive production in F2011.

In North America (still the Company’s most important market), notwithstanding a modest improvement in earnings primarily attributable to the financial services operations, Toyota continues to lag its competition amid the (still modest) recovery in the United States. The Company’s U.S. light-vehicle market share fell further to 14.2% for the three-month period ending March 31, 2011, with the expected limited availability of certain vehicle models due to the Earthquake likely placing further downward pressure on market share in the immediate future. However, even after Toyota fully resumes production and availability of all its models, the Company will still face many headwinds to significantly regain this lost share. DBRS notes that the competitive landscape in the United States has changed significantly. Ford Motor Company and Hyundai Motor Company have achieved considerable market share gains amid strong product momentum. Additionally, General Motors Company appears poised to better defend its position in the United States, with Volkswagen AG also looking to significantly increase its presence in the country.

However, DBRS notes that Toyota’s performance in Asia (excluding Japan) is trending sharply positively. Additionally, equity income, primarily of affiliated companies in Japan and China, is also significantly positive. Toyota will increasingly look to Asia’s emerging markets to bolster its performance going forward.

The ratings continue to be supported by Toyota’s strong business profile as the world’s (currently) largest and highly efficient automotive manufacturer. DBRS notes that the Company’s product portfolio remains very solid, notwithstanding the vehicle recalls. Furthermore, despite sharply lower earnings since F2008, Toyota’s financial profile is still inordinately strong, with the industrial operations having a very sizeable net cash position and the Company’s liquidity position remaining abundant.

Even so, the trend on the AA (low) Issuer Rating remains Negative. Upon some demonstrated recovery of the automotive operations in the United States, DBRS could change the trend on the long-term ratings to Stable. However, in the event that Toyota is expected to incur losses over the coming fiscal year combined with ongoing uncertainty around the Company’s earnings recovery, this could have further negative rating implications. However, this would not be expected to have an impact on the R-1 (middle) Commercial Paper rating given Toyota’s vast liquidity position and, as such, the short-term rating trend remains Stable.

Notes:
The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.