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

DBRS Limited (DBRS) confirmed Honda Motor Co., Ltd.’s (Honda or the Company) Issuer Rating at A (high) and Honda Canada Finance Inc.’s Senior Unsecured Debentures and Commercial Paper ratings at A (high) and R-1 (middle), respectively. All trends are Stable. The confirmations reflect the Company’s strong business risk assessment as an automotive original equipment manufacturer (OEM) of moderate global scale — albeit with strong technological capabilities — with Honda also deriving diversification benefits from its motorcycle and financial services operations.

While Honda’s earnings have been subject to some volatility in recent years, DBRS notes that this substantially reflects unusual items, absent which the Company’s consolidated operating margins have remained roughly constant. Honda’s automotive sales remain highly dependent on its core models (namely, the Accord, Civic, CR-V, Vezel/HR-V and Fit/Jazz) that collectively accounted for approximately 70% of its global unit sales in 2017. DBRS notes that this strong proportionate representation benefits Honda, as its core models are very competitive in their respective vehicle segments. However, acknowledging the growing popularity of utility vehicles globally, albeit most emphatically in North America, the Company is increasing its supply of regionally important models, such as the Pilot, Odyssey and Acura MDX, while expanding utility segment coverage further with the new Honda Passport. Regarding alternative powertrain development, Honda continues to use a multi-pronged approach consisting of internal combustion engines, hybrids, battery electric vehicles and fuel cell vehicles, with the Company targeting the electrification of two-thirds of its global vehicle sales by 2030.

As with all OEMs, Honda faces challenges associated with trade/tariff uncertainties, although DBRS considers these to be well manageable with the Company’s U.K. automotive manufacturing operations being modest vis-à-vis its global scale and only minor impacts currently anticipated from the forthcoming United States–Mexico–Canada Agreement. Future earnings will likely trend moderately upward as a function of ongoing projected sales gains and firmer product mix, with the additional relative growth of the motorcycle segment serving to further support industrial profitability. While Honda will continue to face cost headwinds in the form of new mobility initiatives and tightening emissions requirements, the Company is seeking to control associated costs by way of increasing participation in joint projects and alliances with other OEMs. Moreover, Honda is also expecting to generate additional efficiencies through increased inter-regional coordination of global product development.

The Company’s ratings are expected to remain constant over the near to medium term. DBRS sees limited potential for positive rating actions over the foreseeable future given the high level of the current ratings compared with the industry average and Honda’s moderate scale vis-à-vis the world’s largest OEMs. Conversely, while future earnings underperformance and associated cash burn could potentially result in negative rating pressure, DBRS considers this scenario unlikely.

Notes:
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (April 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

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

The ratings for Honda Canada Finance Inc. are supported by Honda through a keepwell agreement.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada