Honda Canada Finance Inc.: Confirms at "A" & R-1 (middle)

Kam Hon / David Schroeder

(416) 593-5577

The above ratings of Honda Canada Finance Inc., based on the rating support from the ultimate parent, Honda Motor Co., Ltd. (‘Honda’ or ‘the Company’) of Japan, are confirmed with a Stable trend. (Honda Canada Finance Inc. is supported by a guarantee from its 100% owner, America Honda Finance Corporation, which is supported by an Investment Agreement from its 100% owner, American Honda Motor Co. Inc., a wholly owned subsidiary of Honda. American Honda Motor Co. Inc. is supported by a Support Agreement from Honda.) The confirmation reflects Honda’s above average profitability and conservative financial profile.

Honda is benefiting from its diversification efforts. Strong contribution from its North American operations, particularly the automobile business, lifted overall performance in fiscal 1999 (year ended March 31), despite weaker results in Japan and the rest of Asia. Buoyant demand, a favourable product mix and a firmer US dollar led to the strong gain in the automobile business in North America. Return on equity rose to 18% in fiscal 1999 from 17% a year ago. Going forward, ongoing benefits from cost reduction efforts and production process improvement, growing contributions from Europe and Latin America and new model introduction is expected to support earnings at favourable levels. Furthermore, Honda’s less volatile non-automotive income should continue to provide some stability to Honda’s overall earnings. The balance sheet (excluding the financial services business) continued to strengthen with a declining debt level and rising cash resources at the end of fiscal 1999, helped by rising operating cash flow. Continuing overseas expansion should keep capital expenditures moderate, at about current levels. Honda should be able to fund all of its capital needs from internal resources and maintain a strong balance sheet. However, Honda still faces a number of challenges. Global overcapacity and stronger competitors, as a result of consolidation, are likely to intensify an already strong competitive environment in the automobile industry. Honda’s decision to stay independent will likely stress its resources to support the high cost in developing new vehicles and invest in technology to stay competitive. Despite recent international expansion, Honda remains highly sensitive to the relative strength of the Japanese Yen.