DBRS Confirms Honda Motor Co., Ltd. at A (high), Trend Remains Stable

DBRS Limited (DBRS) has today confirmed the long- and short-term ratings of Honda Motor Co., Ltd. (Honda or the Company) and its related companies at A (high) and R-1 (middle), respectively with Stable trends. The confirmation reflects the Company’s strong business profile, with Honda’s automotive products consisting of highly efficient technologies in both conventional internal combustion engines and alternative powertrains. Honda also enjoys modest diversification benefits from its motorcycles segment and financial services operations.

DBRS acknowledges that the Company’s profitability in fiscal 2015 (F2015, ending March 31, 2015) has weakened somewhat compared with F2014, (although results in the first half of F2016 were improved compared with the similar prior-year period). The moderation in earnings performance primarily reflects higher product warranty costs that are significantly a function of the ongoing airbag inflator recall crisis at Takata Corporation (Takata) in addition to slight headwinds in Honda’s native Japanese market as well as certain emerging markets. Moreover, free cash flow generation has been negative in recent years, with Honda undergoing a phase of substantial investment resulting in significantly higher capital expenditures (capex) and research and developmental (R&D) expenses relative to historical norms. This notwithstanding, DBRS notes that Honda’s credit metrics have remained wholly consistent with the assigned ratings, with the Company’s industrial operations maintaining a sizeable net cash position of JPY 785 billion (approximately $6.5 billion) as of March 31, 2015.

Moreover, DBRS expects Honda’s earnings to progressively improve over the near to medium term as the Company enters a particularly favourable period with respect to its product cadence. Recently introduced models include the new HR-V CUV nameplate, as well as the tenth generation of the core Civic model. Significant additional planned product launches include the Honda CR-V and Odyssey. Honda is also bolstering its presence in the light truck and utility vehicle segments in the key United States market through the recently revised Pilot as well as a new Ridgeline pick-up truck to be launched for the 2017 model year, with the Company also increasing regional production/availability of the Acura MDX. Finally, stronger results are anticipated in emerging markets given Honda’s increasing representation in the previously untapped entry-level utility segment through launches of HR-V and BR-V models. Further to the above, free cash flow generation is estimated to progressively increase in line with the projected earnings growth amid a planned moderation in capex, with the Company’s current investment cycle having essentially peaked. While ongoing, the Company’s exposure to the Takata airbag inflator crisis should dissipate as recall-associated repairs are implemented, with Honda also having recently announced that, on a global basis, no new Honda and Acura models currently under development will be equipped with a front driver or passenger Takata airbag inflator.

The Company’s ratings are expected to remain constant over the near to medium term; while future earnings underperformance and associated cash burn could potentially result in negative rating pressures, DBRS considers this scenario unlikely.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The ratings for Honda Canada Finance Inc. are supported by Honda Motor Co., Ltd. through a Keep Well Agreement.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.