DBRS Confirms Toyota at AAA & R-1 (high)

Dominion Bond Rating Service (“DBRS”) has today confirmed the ratings of Toyota Motor Corporation (“Toyota” or the “Company”) at AAA and Toyota Credit Canada Inc. at AAA and R-1 (high). DBRS has also confirmed the Commercial Paper rating of Toyota Financial Services Corporation at R-1 (high). The trends are Stable.

Toyota’s ratings continue to be on course despite the fact that the Company is experiencing sideways earnings growth in a very competitive industry environment. Several factors are constraining income, although these factors are not serious enough to warrant any rating considerations.

These factors include the following:

(1) A wide range of operating costs is growing, including steel and labour costs, depreciation, and research and development costs.
(2) Competition is preventing the pass through of operating costs, which is resulting in a margin squeeze. However, unlike General Motors Corporation and Ford Motor Company, volume sales are growing in all markets except Japan, and this is helping spread the substantial fixed costs over a larger volume base, thereby reducing fixed-costs per unit. This, together with normal cost decreases from efficiency gains, results in earnings, which, although not growing, are reasonably stable. This performance is generally expected to continue, as a growing volume of sales is offset by rising costs and competitive price pressure. Another factor helping earnings is the declining yen since Toyota is still a net exporter of cars out of Japan.

On the financial side, DBRS notes that Toyota continues to have overwhelming strength. Even with capital expenditure of ¥1.4 trillion, versus depreciation of ¥840 billion, and higher dividends, DBRS still expects free cash flow to be over ¥300 billion. This free cash flow, together with existing cash, exceeds total debt (excluding the finance company). As a result, the Company’s financial ratios are overwhelmingly strong. The Company is committed to make share buybacks and dividends within free cash flow to maintain a positive balance sheet. The finance company, although growing rapidly, is reasonably leveraged, and has access to a broad range of alternative sources of funds. The rapid growth gives the finance division the critical mass that its needs to remain competitive and its profitability is expected to maintain a long-term trend.

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 under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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