Toyota Motor 'AA-/A-1+' Ratings Placed On CreditWatch Negative On COVID-19 Pandemic

  • The globally widening impact of the COVID-19 pandemic is likely to add downward pressure on Toyota Motor's profitability, which already faces tough business conditions in the global auto industry.
  • The automaker's EBITDA margin is highly likely to fall far short of our assumptions, because the pandemic is likely to lead to sluggish sales in its main markets, a prolonged impact on production globally, and a risk of large swings in foreign exchange rates.
  • We are placing our long- and short-term credit ratings on the company and its subsidiaries on CreditWatch with negative implications.
  • We intend to resolve the CreditWatch placements after closely reviewing the company's performance in fiscal 2019, and our forecasts for its prospects in the coming one to two years
TOKYO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today said it has placed its 'AA-' long-term issuer and issue credit ratings and its 'A-1+' short-term issuer and issue ratings on Toyota Motor Corp. and its subsidiaries on CreditWatch with negative implications.
We placed our ratings on CreditWatch because we believe the COVID-19 pandemic has triggered a rapid and ongoing deterioration in the automaker's operating environment. This is increasing downward pressure on its EBITDA margin. We believe its profitability is likely to worsen substantially in the coming one to two years to levels the current rating will not tolerate. Its EBITDA margin (excluding captive finance operations) is likely to drop to about 10% in the coming one to two years from 12.1% in fiscal 2018 (ended March 31, 2019).
The global auto industry faces very grim conditions because the COVID-19 pandemic could lead to sluggish auto sales, a prolonged impact on production globally, and a risk of large swings in foreign exchange rates. 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. The pandemic has forced Toyota Motor to announce a temporary shutdown of 13 plants in North America and seven plants in Europe. Large swings in foreign exchange rates could hurt its earnings because it exports nearly half of its vehicles made in Japan. It's more vulnerable to a steep appreciation of the yen against major currencies compared with Honda Motor Co. Ltd., which has a high ratio of overseas production.
Nevertheless, we expect Toyota Motor to maintain extremely sound finances in the next year or two, free of net debt in its automobile business (cash and equivalents and marketable securities exceeded its bank borrowings and debt by ¥7.4 trillion as of Dec. 31, 2019). This is because the company has adhered to a very conservative financial policy. We expect it to focus on improving its cash flows by continuing to prudently manage capital expenditures and growth investments in its automobile business. Its captive finance business is likely to keep asset quality and use of debt at very favorable levels compared with those of its peers. Toyota Motor has made progress dealing with residual losses from its leasing business in the U.S. The company's ample cash and deposits and extremely good relationships with major domestic financial institutions are likely to help keep its liquidity strong.
We intend to resolve the CreditWatch placements within 90 days after examining prospects for Toyota Motor's financial performance based on its fiscal 2019 results and its sales and production plans for fiscal 2020 and beyond. We might consider lowering our long-term rating one notch if we believe its EBITDA margin will drop to about 10% and we determine the margin is unlikely to recover steadily over the next one to two years. In a severe environment with expectations of weak auto sales in its main markets, we think this might be likely under scenarios in which, for example, the company required considerable time to normalize its global supply chain, causing major delays in its production and rollout of new models, or a strong yen or weak currencies in emerging countries exacerbated the negative impact on its earnings performance.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.
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