Honda Canada Finance Inc.

Kam Hon; Walter Schroeder, CFA/416-593-5577 ext.2243/khon@dbrs.com

DBRS is upgrading the Senior Unsecured Debentures of Honda Canada Finance Inc. from “A” to A (high), based on its parent company, Honda Motor Company, Limited (“Honda” or the “Company”) with a Stable trend, and the commercial paper rating is confirmed at R-1 (middle) with a Stable trend.  The rating actions reflect the following reasons: (1) Honda has significantly strengthened its balance sheet the last few years.  Free cash flow, defined as earnings plus depreciation, is consistently able to finance capex and dividends.  DBRS projects that the Company will have about ¥200 billion in free cash available to fund the announced share repurchase (up to ¥100 billion), pay down debt, or accumulate marketable securities in fiscal 2004 (year ended March 31).  Capex levels are stable near ¥300 billion annually, which cover maintenance levels and finance normal growth.  The strong balance sheet, including reasonable leverage for its captive finance company and liquidity support, justifies the rating actions.  (2) The Company has, over time, proved that it is in a strong competitive position, helped by: (a) growing sales and improving market share in the U.S. market, which accounts for over half of total unit sales, and (b) a good product line, (although it lacks pickup trucks), noted for good quality, technology and superior engines.  Earnings have shown stable growth in a competitive and cyclical industry.  Profitability, as measured by return on equity has consistently been in double digits.  These factors more than over-ride a weak position in Europe, and a tough competitive environment, which exists in Japan.  In Japan, Toyota has consistently controlled over 40% of the market leaving it for Nissan and Honda to fight it out for a distant second place.  Honda’s sales of vehicles globally are approaching three million units, which is a relatively small number for a Company that strives to remain independent (no alliances) and has to compete with formidable competitors such as the big three in North America, and Toyota and Nissan in Japan.  So far Honda is growing market share, and gains extra diversification from a good position in motorcycles and power products, and has overcome limitations related to smaller size and lack of alliances. 

Dominion Bond Rating Service Limited (DBRS) has published a full report that provides additional analytical detail.  To see this report, please click on http://www.dbrs.com/web/sentry?COMP=2900&DocId=126842.  If you do not have access to this document, please contact us at info@dbrs.com.