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

DBRS Limited (DBRS Morningstar) confirmed Honda Motor Co., Ltd.’s (Honda or the Company) Issuer Rating at A (high) as well as 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) with moderate global scale, but strong technological capabilities. Honda also derives diversification benefits from its Motorcycle and Financial Services operations. Additionally, consistent with its very conservative financial policy, the Company’s financial risk assessment remains well commensurate with the ratings, notwithstanding a discernible softening in recent earnings performance.

Honda’s moderating earnings reflect headwinds in its Automobile and Motorcycle businesses. Sales volume growth in the Automobile segment has slowed amid a contracting global industry as weaker product mix, softer pricing, and cost headwinds (e.g., product development costs and warranty outlays) have compressed margins. While the Motorcycle segment’s profitability is also decreasing because of weaker conditions in the key Indian market, this will likely reverse as the industry’s structural fundamentals remain positive given favourable demographic trends and low vehicle penetration levels in several emerging markets. DBRS Morningstar notes that earnings of the Company’s Financial Services segment remain resilient and in line with the continued growth and ongoing solid credit quality of its portfolio, substantially concentrated in North America.

In response to these automotive headwinds, Honda is de-emphasizing previous growth targets and focusing on several efficiency initiatives going forward, including capacity reductions across various regions, simplified model allocations and trim variations (while maintaining nameplates), and the progressive implementation of a global “Honda Architecture.” The Company’s alternative powertrain strategy remains consistent with its multipronged approach of internal combustion engines, hybrids, battery electric vehicles, and fuel cell vehicles; the Company aims to electrify two-thirds of its global vehicle sales by 2030. The Company’s automotive sales remain dependent on its global core models (i.e., the Accord, Civic, CR-V, Vezel/HR-V, and Fit/Jazz), but Honda is supplementing these with regional models in various markets (e.g., the Pilot in North America, the Avancier in China, and the N-Box in Japan). While the Company continues to face cost headwinds, such as new mobility initiatives and tightening emissions requirements, Honda is seeking to mitigate these by increasing its participation in joint projects and alliances with other OEMs.

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

Notes:
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2019), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), 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 [email protected].

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

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

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