Moody’s Japan K.K. has placed its Aa2 long-term senior unsecured and issuer ratings on Toyota Motor Corporation (TM) and its supported subsidiaries under review for possible downgrade. The company’s Prime-1 short-term rating is affirmed and not affected by this rating action.
The ratings on the following entities are affected:
Toyota Motor Corporation, Toyota Financial Services Corporation, Toyota Finance Australia Limited, Toyota Credit Canada Inc., Toyota Motor Finance (Netherlands) B.V., Toyota Finance Corporation, Toyota Finance New Zealand Limited, Toyota Financial Services (S. Africa) (Pty).
The review for possible downgrade reflects Moody’s view that Toyota’s financial and operating performance will worsen in the aftermath of the March 11 earthquake and tsunami and the resulting supply chain disruptions. Toyota’s financial performance was already weak relative to expectations for the Aa2 rating level, which had been reflected in the negative outlook.
Although Toyota’s factories have not suffered any significant damages due to the earthquake and tsunami, the disaster has apparently disrupted the shipping of approximately 500 components (albeit out of tens of thousands per model), and the shortage of even one component can significantly disrupt production. Limited production re-commenced at some of the factories at the end of March, but normal production cannot be expected for many months.
Furthermore, although few of Toyota’s production sites are located in the Kanto area, the company’s suppliers may still suffer, given the potential power shortages during the coming high-demand summer season.
Also, Toyota’s dependence on the Japanese market is still high, at about 27%, and expected weak consumer sentiment may have a negative impact on domestic demand that ensuing replacement demand may not be able to offset.
As the company still has a strong business franchise and excellent balance sheet, the likelihood of a multiple-notch downgrade is very limited. Moody’s review will focus on the company’s ability to quickly restore production in Japan and maintain its market positions amid such difficult market conditions.
Prior to the earthquake and tsunami, Standard & Poor’s downgraded Toyota to ‘AA-’ On Weak Profitability:
We have lowered our long-term ratings on Toyota to ‘AA-’ from ‘AA’, based on our view that Toyota’s profitability in the next one to two years is unlikely to recover to a level appropriate for the rating. The stable outlook reflects our expectation that Toyota is likely to maintain the gradual recovery occurring in its profitability, along with its minimal financial risk profile.