Date of Release: 2006-02-23

Honda Motor Co., Ltd. & Honda Canada Finance Inc.

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

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Honda Motor Co., Ltd. (“Honda” or the “Company”) at A (high), as well as the A (high) and R-1 (middle) ratings of Honda Canada Finance Inc. (“HCFI”). The trends are Stable.

The rating of Honda remains on track although the Company faces the following issues:
(1) It is experiencing tough conditions in its home market in Japan, where Toyota is clearly the leader with a dominating 44% market share.
(2) Cost pressures are emerging across a broad front, including cost of sales (raw material costs, labour costs, etc.) and selling, general, and administrative costs (SG&A).
(3) The Company is experiencing aggressive price discounting by Ford Motor Company (“Ford”) and General Motors Corporation (“General Motors”) in the North American market, as Honda is unable to fully pass on rising costs.
(4) HCFI is experiencing rising interest rates, which – along with some non-recurring gains booked last year and not this year – are causing earnings to be squeezed.

DBRS notes these factors are not considered rating issues as Honda is able to overcome the adversities by increasing model sales across the broad product line mix. With a high proportion of fixed costs, Honda is able to spread these fixed costs over a larger volume base, and partly offset the rising costs, which cannot be passed on. Honda also benefits from the weakening yen, as it is a net auto exporter out of Japan.

On the short-term rating side, its R-1 (middle) rating continues to be solid. DBRS notes that even with rising capex levels, cash flow easily covers cash needs and the Company should generate enough operating income through 2008 to pay down debt in this period. The balance sheet of the Company is extremely strong, as net cash exceeds debt (excluding finance companies, and all capital ratios are above average). It is the excellent liquidity supporting the R-1 (middle) short-term rating that prevails, despite the fact that it has an A (high) long-term rating.

DBRS believes that its long-term rating is restricted by Honda’s ranking in the industry, being much smaller than Toyota and Nissan. The tough industry conditions due to the price discounting of General Motors and Ford have affected the ability of Honda to pass on these costs to the consumer. Honda has been constantly criticized for not having size and scope. However, it has raised auto production from 1.8 million units, up to 3.4 million over the past decade and has the intent to reach four million units sold. Thus, DBRS believes it is rapidly attaining size and scope, and the ability to compete with the larger companies.

Notes:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.
The ratings of Honda Canada Finance Inc. are supported by Honda Motor Co., Ltd.

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

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