Honda Canada Inc.: Confirms at R-1 (middle)

Kam Hon / David Schroeder

(416) 593-5577

The commercial paper rating of Honda Canada Inc., based on the rating support from the ultimate parent, Honda Motor Co., Ltd. (‘Honda’ or the ‘Company’) of Japan, is confirmed at R-1 (middle) with a Stable trend. Honda Canada Inc. is supported by a Support Agreement from Honda. The confirmation reflects that: (1) Honda has a strong balance sheet and is virtually debt free (excluding financial services debt) at the end of fiscal 1998. (2) The coverage ratios continue to strengthen, helped by improving operating performance and declining debt levels, and are above average. Operating cash flow exceeded total debt (excluding financial services debt) and net interest coverage grew to 29 times in fiscal 1998. (3) The Company’s profitability is above average. Honda is one of the more efficient automobile manufacturers in the world as a result of ongoing cost reduction efforts and production efficiency gains through process improvement and investment in new facilities. (4) Honda has made good progress in diversifying its operations geographically. Honda has a strong presence in Japan and North America and a growing presence in Europe and Latin America. Diversification reduces the volatility of its earnings by lessening the impact of a downturn in a particular region. However, Honda still faces a number of ongoing challenges. Honda is still heavily dependent on its automotive business, and the automobile industry is highly cyclical, competitive, and with excess capacity. Honda’s profitability is greatly influenced by the relative strength of the Japanese yen. In addition, Honda ranks only eighth (by sales units) in the global automobile industry, which is undergoing consolidation. In the near term, market conditions are expected to remain stable in North America, to strengthen in Europe and to stay weak in Japan and Southeast Asia. With new model introduction and benefits from ongoing cost reduction efforts, Honda is expected to maintain profitability at current levels. In addition, since capital expenditures are expected to decline, growing free cash flow should further strengthen the balance sheet.