DBRS Comments on Toyota’s Settlement of Economic Loss Litigation

DBRS today notes Toyota Motor Corporation’s (Toyota or the Company) announcement on December 26, 2012, of an agreement to resolve economic loss litigation in the United States related to previous recalls by committing to: (1) launching a new customer support program that will provide prospective supplemental coverage for certain vehicle components and will retrofit additional non-hybrid vehicles models subject to the floor mat recall with a free brake override system (BOS), in order to provide an added measure of confidence; and (2) offering cash payments to eligible customers who sold or turned in their leased vehicle in a specific period during 2009-2010, as well as other specified persons and eligible current owners and lessees who will not be offered BOS. The proposed settlement would also establish additional driver education programs and fund new research into advanced safety technologies. The settlement is pending approval by the judge supervising multidistrict litigation in the U.S. District Court for the Central District of California.

Toyota will take a one-time, $1.1 billion pre-tax charge against earnings to cover the estimated costs of the economic loss settlement and possible resolution costs of civil litigation brought in California by the District Attorney of Orange County, and an investigation by a multi-state group of Attorneys General stemming from previous recalls.

DBRS deems the impact of the settlement to not warrant any rating actions, even though the cost of the settlement is meaningful (the Company had estimated the aggregate costs related to the recalls at approximately US$2 billion, excluding the $1.1 billion economic loss litigation settlement). DBRS notes that the Company has a formidable balance sheet and abundant liquidity, and that its operating results have been on a steady upward trend. Hence, the Company can readily absorb the financial impact of the settlement and still maintain a strong financial profile. The Company’s recent progress in regaining market share in the U.S. demonstrates that the fallout of the recalls has not been detrimental. Furthermore, this settlement would also help reduce unwanted distractions to senior management. However, the Company still faces other lawsuits related to the 2009-2010 recalls, with any potential impact still uncertain at this time.

Notes:
All figures are in Japanese yen unless otherwise noted.

The applicable methodology is Rating Automotive Suppliers, which can be found on our web site under Methodologies.

This is a Corporate (Autos and Auto Parts) rating.