DBRS Confirms Toyota Motor Corporation and Related Entities at AA (low) with Stable Trends

DBRS Limited (DBRS) confirmed the long- and short-term ratings of Toyota Motor Corporation (Toyota or the Company) and its rated subsidiaries at AA (low) and R-1 (middle), respectively, with Stable trends. The ratings incorporate Toyota’s very strong business risk assessment (BRA) as a leading global automobile manufacturer with highly efficient operations. The Company’s financial risk assessment (FRA) is also extremely solid, with abundant liquidity comprised largely of substantial holdings of long-term, highly rated government bonds.

Toyota’s recent earnings have been affected by foreign exchange developments that were considerably negative in F2017 (ended March 31, 2017), but since then have turned positive through Q3 F2018. The Company remains more exposed to fluctuations in the Japanese yen, relative to major national peers, as Japan represents more than 45% of its global production. While the Company’s operating performance (notwithstanding volatility attributable to the Japanese yen) remains sound, earnings in North America nonetheless weakened due to moderating industry volumes in the United States, exacerbated by the ongoing shift toward larger segment vehicles and away from cars. Toyota is meaningfully exposed to this shift as it is somewhat more dependent on car sales vis-à-vis the regional industry average, with the Company increasing incentives and marketing expenses to support sales volumes. However, the recent renewal of car models, such as the Camry and Avalon, should enable Toyota to reduce incentives going forward. Toyota is also increasing production of utility vehicles, such as the Highlander and the mid-sized Tacoma pickup. Moreover, the Company and Mazda Motor Corporation announced a joint assembly facility (slated to begin production in 2021) in Alabama where Toyota plans to produce the Corolla, which will enable additional production of the RAV4 CUV model at its Cambridge, Ontario, operations.

Ongoing cost-reduction efforts (which remain on track, notwithstanding recent headwinds stemming from raw material cost increases) continue to bolster the Company’s financial performance. To this end, Toyota is progressively rolling out its Toyota New Global Architecture platform, the benefits of which include additional model derivatives and shorter model changeover periods. Regarding alternative powertrain development, the Company continues to pursue a multi-pronged approach; while hybrids remain core (with Toyota continuing to eye fuel-cell vehicles as a potential ultimate solution), Toyota has recently heightened its focus on electric-vehicle development.

The Stable trend incorporates DBRS’s expectation that the Company will maintain its strong BRA and FRA profiles as global industry volumes (notwithstanding the anticipated moderation in the United States and China) are estimated to remain at solid levels. While Toyota faces ongoing capital outlays in the form of new mobility initiatives/tightening emissions requirements, in addition to shareholder returns, these can be well absorbed by the Company’s strong cash flow generation and liquidity. As such, barring a substantial event, DBRS does not anticipate any change in the ratings over the near term.

Notes:
All amounts are in Japanese yen unless otherwise specified.

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 principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact 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.