DBRS Limited (DBRS Morningstar) confirmed Honda Motor Co., Ltd.'s (Honda or the Company) Issuer Rating at A (high), and Honda Canada Finance Inc.'s Senior Unsecured Debentures and Commercial Paper ratings at A (high) and R-1 (middle), respectively. All trends are Stable. The confirmations reflect the Company's solid business risk assessment as an automotive original equipment manufacturer (OEM) of moderate global scale—albeit with strong technological capabilities—with Honda also deriving diversification benefits from its Motorcycle and Financial Services operations. The Stable trend reflects the Company’s very conservative financial policy amid consistently sound operating performance (notwithstanding some earnings moderation in recent years). Further, Honda’s financial risk assessment (FRA) is expected to remain strong and commensurate with the currently assigned ratings.
In fiscal 2022 (F2022; ended March 31, 2022), the Company's main industrial segments (Automobile and Motorcycle) generated higher earnings year over year (YOY). Increased profitability of the Motorcycle segment reflected higher sales volumes, bolstered by favourable (FX) developments. In the Automobile segment, despite moderately lower volumes (that remained considerably affected by the resurgence of the Coronavirus Disease (COVID-19) and the global semiconductor shortage) and higher raw material costs, profitability also increased YOY, significantly a function of the aforementioned positive FX developments and attained efficiency gains. In H1 F2023, Motorcycle earnings continued to trend positively while profitability of the Automobile segment declined compared with the similar prior year period, substantially reflecting ongoing restrictions in production/sales volumes stemming from the semiconductor shortage and other supply base challenges. Despite these ongoing headwinds, the Company is projecting its F2023 consolidated operating earnings to be essentially constant YOY at JPY 870 billion; DBRS Morningstar deeming Honda’s forecast quite attainable.
Going forward, DBRS Morningstar expects the Company's earnings performance to steadily improve in line with the progressive resolution of the semiconductor shortage, facilitating sales volume growth in the key Automobile segment. While DBRS Morningstar acknowledges market headwinds in form of rising interest rates, inflationary pressures, and geopolitical uncertainty, DBRS Morningstar estimates these to be more than offset by the considerable pent-up demand that has accumulated across the sector. Accordingly, nominal sales growth is estimated in F2023, with more meaningful growth forecast in the following years. The sales growth is expected to be supplemented by efficiency gains, incorporating the increasing application of the Honda Architecture (the Company’s global vehicle platform) and further streamlining of available models and trims. While Honda, consistent with its peers, is pursuing the progressive electrification of its automotive fleet, the Company is targeting increased participation in joint projects and alliances with other OEMs to help moderate associated cost headwinds.
DBRS Morningstar expects the Company’s ratings to remain constant over the near to medium term. DBRS Morningstar sees limited potential for positive rating actions given the high level of the current ratings (compared with the industry average), further noting Honda’s moderate scale relative to the world’s largest OEMs. Conversely, future earnings underperformance and associated cash burn that result in a meaningful weaking of credit metrics could potentially lead to negative rating actions, although DBRS Morningstar considers this scenario rather unlikely.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Honda is subject to a wide range of environmental compliance requirements relating to carbon dioxide, fuel efficiency, emissions control, and other factors. In the event that the Company would not comply with applicable regulations, significant penalties and reputational harm could result. Moreover, such risks could significantly affect Honda’s mid- and long-term initiatives, particularly regarding further electrification of its products. Accordingly, Honda is targeting research and development expenses and investments of JPY 5 trillion in electrification and software over the next 10 years.
Although 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 Honda.
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 (May 17, 2022).
All figures are in Japanese yen unless otherwise noted.
The principal methodologies applicable to the rating are Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042); 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).
The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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.
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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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