Toyota woes deepen with rating downgrade

Toyota has lost its top credit rating

Toyota Motor, the world’s biggest automaker and a towering icon of Japanese industrial power, has been stripped of its AAA credit rating under the darkening global economic storm.

The downgrade, said analysts at Fitch Ratings, effectively passes sentence on the entire worldwide auto industry, showing that the business of building cars can no longer produce a single player with the sort of cast-iron corporate resilience of Exxon Mobil or Johnson & Johnson.

“This crisis is demonstrating that the auto industry cannot support a triple-A rating,” said Frederic Gits, a Tokyo-based credit analyst at Fitch Ratings, which issued the downgrade earlier today and declared the auto-industry’s problems “substantial and fundamental”.

Fitch Ratings’ downgrade of Toyota’s unsecured debt to AA deals a stunning blow to Japanese corporate pride, but reflects “severe” turmoil across world car markets and the company’s own spectacular profits warning earlier this month.

To demonstrate the extent of the problem, brokers in Tokyo have recently started circulating aerial photographs of a military airfield in Oxfordshire that has become a colossal warehouse for thousands of unsold cars.

Two weeks ago and citing a dramatic collapse in US and European sales, Toyota lopped Y1 trillion (£6.8 billion) from its full year earnings estimates: if the company hits its new estimate of Y600 billion for the year ending March 31, it could even lose its crown as Japan’s biggest profits-generator.

“A triple-A rating should mean that the company can withstand any shock. Although the auto industry is not one that you would think of typically as supporting a triple-A rating because of its inherent cyclicality, we thought that Toyota’s strong market positions, cash flow strength and very substantial financial flexibility were sufficient to deserve the highest rating,” Mr Gits told The Times.

“However, we are seeing that even the strongest player can suffer when you have such a deep economic shock as we are now experiencing.”

Toyota, in common with other Japanese exporters, has also seen its margins annihilated by the rapid rise in the yen against the dollar and euro – a grim side-effect from the collapse of stock markets around the world and the mass unwinding of the yen-denominated “carry trades” that financed so many speculative bubbles.

The gains logged by the yen over the last two months have carved a Y690 billion hole in Toyota’s profits, and caused proportionally similar pain to the likes of Sony, Canon and Honda.

But the Fitch downgrade chiefly highlights the huge havoc that the financial crisis has wrought on auto sales everywhere. Even after the downgrade, Toyota remains by far the strongest and highest-rated of the automakers.

The next strongest global player is Honda, whose debt rating stands two full notches below that of Toyota. The US carmakers are many levels below that, and even the strongest German players – Daimler and Volkswagen – do not rival Toyota in ratings strength

November 26, 2008
Leo Lewis, Asia Business Correspondent

Source: Times Online

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