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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Honda Motor Co., Ltd. (Honda or the Company) at A (high) as well as the Senior Unsecured Debentures and Commercial Paper rating of Honda Finance Canada Inc. at A (high) and R-1 (middle), respectively. All trends are Stable. The confirmations reflect the Company’s strong business profile as Honda’s automotive products consist of highly efficient technologies in both conventional internal combustion engines and alternative powertrains. The Company also enjoys modest diversification benefits from its motorcycle segment and financial services operations.

DBRS notes that Honda’s profitability in F2016 (ending March 31, 2016) was materially lower than in F2015, which is primarily attributable to higher product warranty costs that largely resulted from the airbag vehicle recall crisis at Takata Corporation (Takata). Through H1 F2017, however, the Company’s industrial earnings have improved considerably compared with the similar prior-year period, in line with reduced selling, general and administrative expenses that reflect the reversal of the Takata-related warranty costs, bolstered by moderately improved sales performance (reflecting higher volumes and firmer product mix) and ongoing cost-reduction efforts. These positive factors more than offset negative foreign-exchange (FX) effects associated with the relative strengthening of the Japanese yen. Full-year F2017 industrial earnings are expected to increase relative to F2016 in line with these factors. DBRS further notes that negative FX effects are likely to be muted compared with the Company’s public forecast, given the recent meaningful weakening of the yen subsequent to H2 F2017.

Going forward, DBRS anticipates that Honda’s earnings will progressively improve over the near to medium term in line with ongoing cost-reduction efforts amid industry conditions that, in aggregate, remain rather favourable as the Company looks to China to represent the largest source of vehicle sales growth over the next few years. Honda’s product cadence remains solid; recently introduced models include a wholly revised CR-V with full model revisions of the Accord and Odyssey nameplates also slated in the forthcoming year. DBRS also notes that the Company’s earnings are likely to be further supported by higher projected capacity utilization levels across its manufacturing network, notably in Europe (reflecting the progressive roll-out of the Honda Civic Hatchback) and in Japan (in line with a projected increase in vehicles exported to other markets). Moreover, free cash flow generation is estimated to progressively increase in line with the projected earnings growth amid a planned moderation in capital expenditures as Honda’s aggregate production capacity is estimated to remain flat over the next few years.

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 to be 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 methodologies are Rating Companies in the Automotive Manufacturing Industry and Global Methodology for Rating Finance Companies, 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.