Date of Release: 2005-02-22

Honda Motor Company, Limited & Related Entities

Confirms at A (high) & R-1 (middle)

Dominion Bond Rating Service (“DBRS”) has confirmed the rating of Honda Motor Company, Limited (“Honda” or the “Company”) and the ratings of Honda Canada Finance Inc. based on its ultimate parent, Honda, as indicated above. The trends are Stable. The confirmations reflect the Company’s strong financial profile, which is well above most of its peers in the automotive industry.

Honda’s renowned efficient manufacturing processes, attractive product designs, and expertise in engine technology are the key factors that continue to help the Company earn above-average profitability in the fiercely competitive auto industry. Another key strength supporting Honda’s ratings is its strong balance sheet (with financial services on an equity basis). On a net basis, Honda has been virtually debt free since fiscal 2001 (year ended March 31). A modest debt level has also contributed to the very strong coverage ratios. Internal cash generation has consistently funded capital spending, and a large cash position further adds its financial flexibility. The Company’s strength in motorcycles and a growing finance operation provide a modest degree of business diversity, although contribution from these businesses has been modest.

DBRS notes that the near-term sales trend at Honda is encouraging, with share gain in Japan reversing the recent decline, good growth in Asia (particularly China), and stable operations in North America. The upcoming launch of a brand new Civic, its second-largest car in terms of volumes, in late 2005 is viewed as positive. In addition, profitability in Europe continues to improve with modest unit growth.

Honda is still dependent on the highly cyclical automobile business (over 70% of operating profit in fiscal 2004), particularly in North America, its largest market. However, Japan remains the Company’s main production base despite recent expansion in overseas markets. Hence, Honda is vulnerable to the relative value of the yen, particularly against the U.S. dollar. DBRS believes the continuing weakness in the U.S. dollar is a major risk to Honda’s near-term profitability. Rising commodity prices and sales incentives are also wild cards to maintaining profit growth.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.

Related Research

• Honda Motor Company, Limited & Honda Canada Finance Inc.