DBRS Morningstar Confirms Honda Motor Co., Ltd. at A (high) with a Negative Trend; Removes Rating from Under Review with Negative Implications

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 Negative. Pursuant to the moderate scenario 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 indicated in the subsequent document “Global Macroeconomic Scenarios: September Update”), DBRS Morningstar projects the Company’s financial risk assessment (FRA) to remain at levels commensurate with the existing ratings despite an anticipated softening of Honda’s credit metrics given the global escalation of the Coronavirus Disease (COVID-19). The Negative trend nonetheless reflects ongoing challenges facing the automotive industry given uncertainty about the continued progression of the coronavirus across various jurisdictions and its potential impact on sales or production levels. With this rating action, all three ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar acknowledges that the Company’s earnings were softening somewhat even prior to the onset of the coronavirus pandemic, although this was considerably a function of prevailing automotive industry headwinds (notably including moderating global sales amid increasing product development costs) that also affected many of Honda’s peers. However, the Company’s FRA has remained at strong levels (providing moderate cushion even in the context of the current ratings) given Honda’s very conservative financial policy. As with other auto manufacturers, the Company’s financial results this year have trended materially weaker (compared with similar prior year periods), substantially reflecting the global progression of the pandemic. More specifically, in the first quarter of fiscal 2021 (F2021, ended March 31, 2021), Honda reported consolidated revenues of JPY 2.1 trillion (relative to revenues of JPY 4.0 trillion in Q1 F2020) while incurring an operating loss of JPY 114 billion (roughly equivalent to USD 1.06 billion). Concurrent with the release of its Q1 F2021 results, Honda announced its forecast for F2021 as the Company projects annual consolidated revenues to decline by 14% year over year (YOY) to JPY 12.8 trillion (roughly equivalent to USD 121 billion) with consolidated operating income estimated to decrease by 68% YOY to JPY 200 billion (roughly equivalent to USD 1.9 billion). Currently, DBRS Morningstar projects the decline in Honda’s industrial revenues to moderately exceed its forecast, with earnings in turn declining substantially albeit remaining at positive levels (benefitting from various cost-reduction measures bolstered by worker furloughs in certain jurisdictions). With respect to free cash flow generation, DBRS Morningstar estimates such to decrease correspondingly with lower earnings (although a slight decline in capital expenditures and a two-thirds reduction in cash dividend payments represent a partial offset), possibly exacerbated by material working capital cash usage. As such, DBRS Morningstar projects the Company’s credit metrics to meaningfully soften in F2021, followed by only a moderate recovery in the following fiscal year.

Notwithstanding the above, Honda’s balance sheet and liquidity position remain strong and are deemed by DBRS Morningstar to be readily sufficient to absorb any foreseeable scenario associated with the pandemic. As of June 30, 2020, cash and cash equivalents of the industrial operations totalled JPY 2.3 trillion (compared with industrial debt of JPY 831 billion), with the Company maintaining substantial availability of committed credit lines.

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 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 had continued through to August, in which monthly sales increased by 12.8% relative to the similar prior year period (as indicated by the China Association of Automobile Manufacturers). Moreover, in the United States, where DBRS Morningstar acknowledges that the pandemic shows no signs of abating across several states, regional sales are nonetheless proving resilient, with the seasonally adjusted annual sales rate (SAAR) in September exceeding 16 million units.

Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of the coronavirus pandemic, DBRS Morningstar notes that an additional progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) or sustained further erosion in Honda’s operating margins could result in additional downward rating pressures. Conversely, should the worst effects of coronavirus be significantly contained through the first half of F2021 and followed by a meaningful recovery notwithstanding lingering remnants of the pandemic across various jurisdictions, 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 22, 2020), 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].

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