DBRS Morningstar Confirms Toyota Motor Corporation at AA (low) with a Negative Trend; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Toyota Motor Corporation (Toyota or the Company) at AA (low) and confirmed the Issuer Rating of Toyota Financial Services Corporation at AA (low). Additionally, DBRS Morningstar confirmed Toyota Credit Canada Inc.’s Issuer Rating and Medium Term Notes rating at AA (low) and its Commercial Paper rating at R-1 (middle). The trend on all ratings is Negative. Pursuant to the moderate scenario as outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (initially dated April 22, 2020, and most recently updated on September 10, 2020, as “Global Macroeconomic Scenarios: September Update”), DBRS Morningstar estimates that the Company’s financial risk assessment (FRA) will remain at levels commensurate with the current ratings, despite an anticipated softening of Toyota’s credit metrics given the global escalation of the Coronavirus Disease (COVID-19). The Negative trend reflects ongoing significant headwinds facing the automotive industry and uncertainty about the progression of the coronavirus, specifically with respect to its likely subsequent impact on sales or production levels. With these rating actions, Toyota’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar notes that prior to the coronavirus pandemic, the Company’s FRA was at a very strong level (providing a moderate cushion even in the context of the current ratings), given Toyota’s highly conservative financial policy and consistently solid operating performance. As with other auto manufacturers, the coronavirus pandemic materially affected the Company’s operations globally, initially in China in January 2020 and subsequently across Japan, North America, and Europe as well as several other smaller jurisdictions. Inversely following the trajectory of the pandemic, Toyota’s financial results for the first quarter of F2021 (ending March 31, 2021), were weaker compared with the same prior year period as the Company reported consolidated revenues of JPY 4.6 trillion (relative to revenues of JPY 7.7 trillion in Q1 F2020). Moreover, the consolidated operating margin declined substantially (albeit remaining positive) to 0.3%, compared with the level of 9.6% generated in Q1 F2020. Concurrent with the release of its Q1 F2021 results, Toyota reaffirmed its outlook for F2021 as the Company projects annual consolidated revenues to decline by 20% year over year (YOY) to JPY 24.0 trillion (roughly equivalent to USD 229 billion) with consolidated operating income estimated to decrease by 79% YOY to JPY 500 billion (roughly equivalent to USD 4.8 billion). In line with the above, DBRS Morningstar estimates the decline in the Company’s automotive revenues will slightly exceed 20%, with automotive earnings in turn declining substantially, albeit remaining at positive levels. (Note: Toyota does not disclose its interim results nor its outlook on a segmented basis, i.e., breakdown of automotive versus financial services.) DBRS Morningstar estimates free cash flow generation will decrease correspondingly with lower earnings and be exacerbated by working capital cash usage, with overall credit metrics as a result estimated to meaningfully soften in F2021, followed by only a moderate recovery in the next fiscal year.

Notwithstanding these challenges, DBRS Morningstar notes that Toyota’s balance sheet and liquidity position remain inordinately strong. As of June 30, 2020, total liquid assets of the Company (defined by Toyota as cash and cash equivalents, time deposits, public and corporate bonds, and its investment in monetary trust funds, excluding in each case those relating to financial services) exceeded JPY 9 trillion (roughly equivalent to USD 86 billion). As such, DBRS Morningstar deems the Company’s liquidity position to be readily sufficient to absorb any foreseeable scenario associated with the pandemic.

Despite the negative effects of the coronavirus pandemic on global automotive sales and production, DBRS Morningstar nonetheless notes that the ensuing sales recovery across major jurisdictions has thus far moderately exceeded its expectations. Significantly, industry sales in China (the world’s single largest automotive market) reverted to YOY growth as of April 2020 (following an extended decline of close to two years) that has continued through to August, in which monthly sales increased by 11.6% relative to the same prior year period (according to the China Association of Automobile Manufacturers). Moreover, in the United States, where DBRS Morningstar acknowledges that the pandemic shows no signs of abating, regional sales are nonetheless proving resilient, with the seasonally adjusted annual sales rate (SAAR) in August estimated to have exceeded 15 million units.

Consistent with the Negative trend on the ratings, DBRS Morningstar notes that a continued progression of the pandemic (such that it results in a further material softening of the Company’s FRA and associated credit metrics to levels typically below the AA rating category) could result in additional downward rating pressures. Conversely, should the worst effects of the coronavirus pandemic be significantly contained through the first half of F2021 and followed by a meaningful recovery, the trend on the ratings could be changed to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577