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Fitch Affirms Toyota Motor Credit Corporation and Affiliates at 'A'; Outlook Stable
October 10, 2017 / 3:36 PM / 2 months ago

Fitch Affirms Toyota Motor Credit Corporation and Affiliates at 'A'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, October 10 (Fitch) Fitch Ratings has affirmed the ratings for Toyota Motor Credit Corporation (TMCC) and its affiliates, Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc., Toyota Finance Australia Limited, and Toyota Kreditbank GmbH at 'A/F1'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRs AND SENIOR DEBT The ratings for TMCC and its affiliates are equalized with and linked to those of its parent, TMC, since Fitch views the issuers as core subsidiaries of TMC. The equalization reflects strong implicit and explicit factors including a high percentage of TMC sales financed by the subsidiaries, significant operational linkages between the companies and the existence of a credit support agreement between the parent and the subsidiaries. In addition to the institutional support considerations, TMCC's risk profile is further supported by its strong asset quality, historically strong profitability and a predominately unsecured funding profile. Credit constraints include elevated leverage and a heavy reliance on commercial paper (CP) funding. Asset quality remains strong, but credit metrics continue to increase towards levels more in line with TMCC's long-term averages. Net chargeoffs for fiscal year 2017 (FY17; 12 months ended March 31, 2017) and the three months ended June 30, 2017 (1Q18) were up nine basis points (bps) and down two bps year-over-year, respectively. The slight decline in 1Q18 is not believed to be sustainable given rising consumer debt levels. Still, losses remain low overall and compare favorably to auto captive finance peers, which reflects the prime nature of the portfolio. Delinquencies of 60 days or more remained relatively stable, increasing one basis point (bp) in FY17 and decreasing one bp in 1Q18, relative to the prior year periods. Fitch expects asset quality to remain solid, but it is likely to weaken driven by a highly competitive environment, a further moderation in used car values and rising U.S. consumer debt levels. Operating profits have declined since the beginning of 2015 but remain stronger than pre-crisis levels. When adjusting for non-cash derivative gains, the company reported a pre-tax margin of 8.9% in 1Q18, which was down from 12.5% in 1Q17. TMCC's pre-tax margin in FY17 was 5.4%, down from 12.9% in FY16. Profitability has decreased since fiscal 2016 primarily due to rising interest expense, higher depreciation on operating leases, and a higher provision for credit losses. This has been partially offset by stronger gross finance revenues driven by steady yields and a growing portfolio. Fitch expects margins will continue to be pressured by heavy competition and a weaker credit environment, but portfolio expansion and strong credit performance should help maintain solid profitability levels in FY18. Leverage, as measured by debt to tangible equity, was 10.2x and 10.3x for 1Q18 and FY17, respectively. These metrics remain high relative to the captive finance average, despite falling from a pre-crisis high of 17.8x at FY09. Nevertheless, TMCC manages leverage via dividend payments to the parent and Fitch finds comfort in the ability of the parent to suspend these payments, as was demonstrated during the last financial downturn, to manage leverage and liquidity at the captive. TMCC did not pay any dividends to its parent in FY17 or FY16. TMCC's funding profile is primarily unsecured and diversified by type, term and currency. Term funding requirements are met through the issuance of a variety of debt securities in both the U.S. and international capital markets. TMCC's unsecured debt represented 86% of total debt at 1Q18. Short-term CP issuance has increased since the financial crisis, and short-term debt (CP and the current portion of long-term debt) as a percentage of total debt was 50.7% at FY17, which is above pre-crisis levels and considerably higher than captive auto finance peers. TMCC's CP program is supported by $20.4 billion in committed backup credit facilities and $9.9 billion in cash and marketable securities held on balance sheet, which covers 113.7% of CP but with only 60.8% of total debt (including CP) maturing in FY18. In addition, CP is covered under the support agreement with TMC, which provides an additional source of backup liquidity, if needed. Still, Fitch would view a decline in short-term debt favorably, as it would improve TMCC's financial flexibility. Fitch expects TMCC will look to issue unsecured debt to refinance a portion of senior unsecured debt maturities in FY18. RATING SENSITIVITIES IDRs AND SENIOR DEBT TMCC's ratings are linked to those of its parent and are therefore sensitive to changes in TMC's rating. However, negative rating actions for TMCC and its affiliates could also be driven by a change in the perceived relationship between TMC and TMCC and its affiliates, such as if Fitch believed that the subsidiaries were no longer core to the parent's strategic operations or if adequate financial support were not provided in a time of need. Additionally, material credit quality deterioration, the recognition of consistent operating losses, a material increase in leverage, and/or deterioration in TMCC's liquidity profile could have a negative impact on TMC's ratings and therefore, the ratings of TMCC and its affiliates. Positive rating momentum for TMCC will be limited by Fitch's view of TMC's credit profile. Fitch cannot envision a scenario where TMCC would be rated higher than its parent. Fitch has affirmed the following ratings: Toyota Motor Credit Corporation Toyota Motor Finance (Netherlands) B.V. Toyota Finance Australia Limited --Long-term Issuer Default Rating (IDR) at 'A'; --Short-term IDR at 'F1'; --Senior unsecured debt at 'A'. --Senior unsecured debt at 'F1'. Toyota Credit Canada Inc. Toyota Kreditbank GmbH --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Senior unsecured debt at 'A'. The Rating Outlook is Stable. Contact: Primary Analyst Jared Kirsch, CFA Associate Director +1-212-908-0332 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Michael Taiano, CPA Director +1-646-582-4956 Committee Chairperson Meghan Neenan, CFA Managing Director +1-212-908-9121 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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