S&P Revises Outlook on Toyota (TM) to Stable; Ratings Affirmed

April 16, 2013 6:16 AM EDT
Standard & Poor's Ratings Services said it has revised to stable from negative the outlook on its 'AA-' long-term corporate credit rating on Toyota Motor Corp. (NYSE: TM) and related entities, including Toyota Motor Credit Corp.

The outlook revision reflects our view that Toyota Motor is likely to accelerate an improvement in profitability and maintain its exceptionally strong financial position in the next two to three years. At the same time, we affirmed the 'AA-' long-term and 'A-1+' short-term ratings on the company and related entities.

We expect improvement in Toyota Motor's current mediocre profitability to accelerate. In our base-case scenario, we expect Toyota Motor's nonfinancial services operations to achieve an EBIT margin of about 7% and an EBITDA margin of about 11% for fiscal 2014 (ending March 31, 2015), compared with about 4% and 8%, respectively, under Standard & Poor's forecasts for fiscal 2012. We believe Toyota Motor's competitive position remains strong despite a series of setbacks in recent years, including the global financial crisis, massive vehicle recalls, and two natural disasters. The company has made a strong recovery in market share in the U.S.--to 14.4% in 2012, close to its prerecall level, from 12.9% in 2011. Toyota's historically strong position in Southeast Asia should allow it to capitalize on prospects for solid vehicle demand in the region. Moreover, reduced risk of adverse effects from a strong yen should make a positive material contribution to earnings. In our opinion, Toyota Motor's proven ability to consistently reduce costs should also help it improve profitability. The company has cut about ¥300 billion a year in costs in recent years.

We still see overproduction in Japan, where Toyota Motor makes many vehicles for overseas markets, as a weakness that could prevent the company from continuing to improve profitability in the event that the yen strengthens significantly again. However, we do not anticipate such a possibility in our base-case scenario. Moreover, we believe Toyota Motor is continuing to take measures to reduce its exposure to fluctuations in the value of the yen--increasing local content in vehicles made overseas and increasing imports of components for vehicles made in Japan.

We continue to view Toyota Motor's financial risk profile as "minimal." Toyota Motor has substantial cash and marketable securities and remains virtually free of net debt in its nonfinancial services operations. We expect measures of Toyota Motor's credit quality to remain very strong over the next two years, with a ratio of funds from operations (FFO) to debt of significantly more than 100% and a ratio of debt to EBITDA of less than 0.5x on a fully adjusted basis.

Exceptional liquidity underpins our 'AA-' long-term rating on Toyota Motor. We believe the company's sources of liquidity will easily exceed 2x uses over the next two years. As of Dec. 31, 2012, Toyota Motor had ¥1.4 trillion in cash and cash equivalents on a consolidated basis. Moreover, Toyota Motor holds large investments in highly rated government securities such as Japanese government bonds and U.S. Treasury bonds, and it classifies these as both current assets and investments. We view these as high-quality financial assets that further support Toyota Motor's exceptional liquidity. Toyota Motor's ¥5.4 trillion in total cash and securities on a consolidated basis significantly exceeded ¥2.4 trillion in long-term debt due to mature within a year. We believe Toyota Motor maintains a massive net cash position in its nonfinancial services operations. In addition, as of March 31, 2012, the company had ¥7.6 trillion in long-term unused lines of credit, and it maintains strong relationships with major Japanese banking groups. Short-term assets in Toyota Motor's captive finance operations adequately match short-term debt.

We may lower our ratings on Toyota Motor if the company is unlikely to maintain a recovery in profitability, for example, if it is unlikely to achieve and sustain an EBITDA margin of 10%. Such a scenario could materialize if the yen strengthens significantly again or vehicle demand falls precipitously in the U.S. or Southeast Asia. We may also lower the ratings if Toyota Motor cannot maintain a "minimal" financial risk profile. A higher rating is unlikely in the near term given the challenges of generating stronger, less volatile profitability without meaningfully reducing yen
exposure or expanding sales, particularly of its luxury Lexus brand, amid intense competition.

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