Honda Motor 'A/A-1' On CreditWatch Negative On COVID-19 Pandemic

  • We believe downward pressure on Honda Motor's profitability is likely to further increase, owing to the severe business conditions caused by the COVID-19 pandemic.
  • Considering the likely very weak sales in key markets and disruption to global supply chains, together with fluctuating foreign exchange rates, the company's EBITDA margin is likely to be much weaker than we had expected.
  • We are placing all our ratings on Honda Motor on CreditWatch with negative implications.
  • We intend to resolve the CreditWatch placements following the announcement of the company's fiscal 2019 results. We intend to re-examine our base-case assumptions regarding projections for the company's new car sales, global production, and financial performance over the next one to two years.
TOKYO (S&P Global Ratings) March 25, 2020--S&P Global Ratings today said that 
it has placed its 'A' long-term issuer credit and long-term senior unsecured 
ratings on Honda Motor Co. Ltd. on CreditWatch with negative implications. Its 
'A-1' short-term issuer credit rating has also been put on CreditWatch with 
negative implications. The placement reflects our view that the company's 
EBITDA margin is likely to drop significantly below the level set out in our 
assumptions, due to the rapid deterioration of business conditions caused by 
the COVID-19 pandemic. We believe the company's EBITDA margin will decline 
significantly and reach a level that is not commensurate with the rating, 
given the expected very weak car sales in key markets, possible disruption to 
global supply chains, and the risk of volatile foreign exchange rates. 

We believe Honda Motor's EBITDA margin (excluding its captive finance 
operations) will drop below 8% over the next two years, from 9.6% in fiscal 
March 2019. We assume annual new car sales will fall in North America by 
15%-20% year-on-year in 2020 and recover by 10%-12% in 2021. In the same 
years, respectively, we assume they will fall 15%-20% and recover 9%-11% in 
Europe; and fall by 8%-10% and recover by 2%-4% in China. Honda Motor's new 
car sales in China fell by 85% year-on-year in February. China accounts for 
about 30% of Honda Motor's production. In addition, the company has announced 
that production has been suspended at seven automobile factories and five 
component factories in North America. In our opinion, negative pressure on the 
company will likely increase as business conditions are expected to worsen 
further unless the COVID-19 pandemic is contained quickly. We also believe 
that fluctuating exchange rates will potentially hurt the company's earnings. 

However, we believe that Honda Motor will maintain a high level of product 
competitiveness and brand recognition in key markets including China and the 
U.S. We also believe Honda Motor's more profitable motorcycle business can 
mitigate pressure on the earnings of its automotive business. 

Honda Motor's financial standing will likely remain strong, even if the 
company's discretionary cash flow (free operating cash flow minus shareholder 
returns) temporarily falls into deficit, in our view. The company has an 
extremely strong balance sheet, with a net cash position of ¥1.9 trillion 
(excluding its captive finance operations; as of December 2019). We expect 
Honda Motor to control its capital expenditure more closely under the 
difficult circumstances. In addition, it should be able to manage its cash 
flow, backed by higher used car prices and lower sales incentives compared 
with many of its peers.

We intend to resolve the CreditWatch placement within 90 days. Following the 
company's announcement of its results for fiscal 2019, we intend to re-examine 
our base-case assumptions regarding projections for Honda Motor's new car 
sales, global production, and financial performance over the next one to two 
years. We may lower the ratings if Honda's adjusted EBITDA margin deteriorates 
to below 8% and we believe the likelihood of an early recovery is limited. 
Considering the expected weak global car sales, this could occur if 1) there 
is a significant delay in production and the planned rollout of new models due 
to a prolonged period being needed to normalize global supply chains, or 2) 
significant fluctuation in foreign exchange rates severely impacts its 
earnings. 

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