DBRS Limited (DBRS Morningstar) confirmed the Issuer Ratings of Toyota Motor Corporation (Toyota or the Company), Toyota Financial Services Corporation, and Toyota Credit Canada Inc. (TCCI) at AA (low). Additionally, DBRS Morningstar confirmed TCCI’s Medium-Term Notes and Commercial Paper at AA (low) and R-1 (middle), respectively. The trends on all ratings are Stable. The ratings incorporate Toyota’s solid business risk assessment as a leading global original equipment manufacturer with a strong presence in both mainstream and luxury automotive segments as well as a dominant position in its native Japanese market. Additionally, despite various industry headwinds (ranging from the Coronavirus Disease (COVID-19), the global semiconductor shortage, and, more recently, rising interest rates, inflation, and geopolitical uncertainty), DBRS Morningstar estimates Toyota’s financial risk assessment (FRA) to remain well commensurate with the current ratings.
Toyota’s F2022 (ended March 31, 2022) results strengthened considerably year-over-year, despite ongoing production constraints attributable to the coronavirus pandemic and the global semiconductor shortage. The operating margin of the Company’s Automotive business increased to 8% (from 6.5% in F2021) in line with higher volumes (albeit from low F2021 levels), firmer product mix, and favourable foreign exchange effects. The semiconductor shortage continued to adversely affect Q1 F2023 earnings, which softened compared with the similar prior year period amid declines in volumes and product mix, with cost increases (notably higher raw material costs) representing another negative factor. While these headwinds are estimated to persist over the near term and affect its F2023 annual performance, Toyota’s longstanding efforts in cost reductions, new product development focused on the Toyota New Global Architecture platform, and attained pricing gains help support its financial performance. As such, the Company is still expected to remain substantially profitable, with Toyota projecting F2023 consolidated earnings in the amount of JPY 2.4 trillion (USD 18.5 billion).
Going forward, DBRS Morningstar notes the automotive industry faces meaningful cost headwinds over the next several years in line with the increasing electrification of vehicles (as a function of the tightening of emission regulations globally) amid ongoing investments in new mobility business initiatives. Toyota remains well positioned to withstand these challenges given its (1) substantial liquidity position, with total liquid assets as of March 31, 2022, amounting to JPY 10.5 trillion (roughly USD 94 billion equivalent); (2) strong track record in efficiency gains; and (3) established presence in electrified (i.e., battery electric vehicles (BEVs) and hybrid electric vehicles (HEVs)) models.
Consistent with the assigned Stable trends, the ratings are expected to remain constant over the near to medium term. DBRS Morningstar notes Toyota’s FRA, including its inordinately strong liquidity position, provide a cushion against unexpected challenges, rendering a downgrade unlikely. Conversely, an upgrade is not anticipated over a similar time horizon in line with the aforementioned cost headwinds facing the industry.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Toyota faces an assortment of laws and governmental regulations related to environmental matters such as emission levels, fuel economy, noise, and pollution. Accordingly, the Company faces risks from the transition to a lower-carbon economy. Toyota will need to respond to changes in customer demand trends by providing a diverse set of product options, while taking into consideration region-specific electric power conditions. The Company is promoting its vehicle-electrification strategy from all directions, including BEVs, HEVs, plug-in hybrid electric vehicles, and fuel cell electric vehicles. In December 2021, Toyota announced its objective of developing 30 types of BEVs and achieving a full lineup in each segment globally by 2030 to achieve global sales of 3.5 million BEVs per year by 2030. The Company also announced plans to invest a total of approximately JPY 8 trillion in capital expenditures, research and development expenses, and other investments relating to electrification by 2030. Of the planned JPY 8 trillion, approximately JPY 4 trillion is expected to relate to BEVs; of the approximately JPY 4 trillion toward BEVs, approximately JPY 2 trillion is planned to be related to batteries.
While the environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Toyota. There were no social or governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in Japanese yen unless otherwise noted.
The methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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