Honda Canada Finance Inc.: Rates at "A"

Nigel Heath/Kam Hon

(416) 593-5577

e-mail: nheath@dbrs.com

DBRS is assigning an initial senior long term debt rating of "A" to Honda Canada Finance Inc. The rating trend is Stable. As with HCFI’s commercial paper program, the debt rating is supported by a guarantee from its 100% owner, American Honda Finance Corporation (AHFC), which is indirectly wholly owned by Honda Motor Co., Ltd. in Japan. Honda Motor Co. Ltd. (Honda) supports the U.S. subsidiaries through a support agreement. Honda continues to report record results, reflecting the impact of improved unit sales, weakening yen (average of ¥119=US$1 first half 1997, versus ¥110=$1 in prior year), and the benefit of several years of cost reduction initiatives. First half earnings to September 30, 1997 increased 40.7% to ¥126.4 billion (US$1.0 billion), which produced an ROE of 17.6%. The net profit margin of 4.5% is much improved over levels of the past several years. Management has recently forecasted net profit of ¥250 billion for the year ended March 31, 1998, an increase of 13% compared to the prior year. While the exchange rate assumption currently appears to be conservation, at ¥117=$1 (currently ¥124=$1), this is expected to be partly offset by the slowing Asian economies (including Japan), and the negative impact on sales and the higher cost of imported parts.

The balance sheet is stronger than it appears because Honda consolidates its finance companies. Excluding the finance subsidiaries, the percentage debt was below 30% of capital at March 31, 1997 (net debt was below 15%), and is expected to continue to decline. Cash flow exceeded 60% of total debt in fiscal 1997, and DBRS anticipates that this will exceed 70% of total debt in fiscal 1998. Therefore, Honda will have the capacity to continue to pay down debt of the industrial operations, despite higher expected capital expenditure levels. Reflecting strong North American auto sales, American Honda Finance Corp. (including Honda Canada Finance Inc.) has been growing rapidly, but leverage remains satisfactory. Honda continues to benefit from its global diversification, a strong product line, its relatively modern production facilities located in Japan, U.S., Canada, the U.K., and various developing nations. It is also a world leader in motorcycles, which provides diversification to income and cash flow, and shifting its production base outside Japan has helped to reduce the sensitivity to the value of the yen. Nevertheless, Honda operates in the cyclical and highly competitive automotive sector and remains sensitive to foreign currencies.