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Fitch Affirms Honda at 'A'; Outlook Stable
October 15, 2015 / 6:53 AM / 2 years ago

Fitch Affirms Honda at 'A'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/SEOUL, October 15 (Fitch) Fitch Ratings has affirmed Japan-based Honda Motor Co., Ltd's (Honda) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) and senior unsecured debt rating at 'A'. The Outlook is Stable. Fitch has also affirmed the company's Short-Term Foreign- and Local-Currency IDRs at 'F1'. KEY RATING DRIVERS Strong Business Profile: Honda's ratings reflect its leading market share in key markets including Japan, the US, and Asia; its strong product line-up; competitiveness in hybrid vehicles; and a diversified business portfolio, which includes the world's largest motorcycle business by unit sales. Stable Profitability: Fitch expects Honda's EBIT margin on industrial operations (automobile, motorcycle and power products) to remain stable at around 4% in the financial year to 31 March 2016 (FY16) from the previous year due to an enhanced product portfolio, moderate sales volume growth and cost control. Moderate Sales Volume Growth: We expect Honda to achieve modest auto sales volume growth in FY16. Moderate growth in the US and Asia should offset declines in Japan and Europe, and continued volatility in emerging markets. However, a weakening global economic outlook - precipitated by a structural slowdown in China and many emerging markets - and recession in Russia and Brazil, could slow volume growth and cause some margin erosion in FY17, particularly if it affects the currently buoyant US market, which is a key profit driver. New/Refreshed US Model Cycle: We expect a new/refreshed model cycle to help boost Honda's sales volume growth in FY16 in the US, which is a key market for the company. The range includes the HR-V and CR-V (compact SUV), Pilot (SUV), and Civic (passenger car). Reduced FX Benefit: Honda's expansion of overseas production capacity over the past few years has reduced its overall FX exposure, but has also limited the beneficial impact on profitability of a continued weak yen versus the US dollar. Strong Financial Profile: We expect Honda's financial profile to remain strong, with FFO-adjusted gross leverage on industrial operations below 1.0x (FY15: 0.6x) and CFO/adjusted debt above 100% (FY15: 143%). Robust Liquidity: Honda continues to maintain a healthy net cash position, backed by ample liquidity. Honda's industrial business had net cash of JPY786bn at FYE15 (FYE14: JPY613bn). Over 70% of FY15 total debt was short-term and consisted primarily of domestic Japanese bank loans, but it was more than covered by cash and cash equivalents of JPY1,379bn (FY14: JPY1,172bn). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Sales volume growth in the US and Asia offsetting declines in Japan and Europe in FY16; - EBIT margin on industrial operations around 4% in FY16; - Capex to revenue of around 5% in FY16 (FY15: 5.8%) RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Market share erosion in key markets - Substantial deterioration in global auto demand leading to significant decline in operating profit - Sustained negative FCF - Industrial FFO gross adjusted leverage above 1.0x on a sustained basis Positive: A near term upgrade of Honda's ratings is unlikely. Typically, the inherent cyclicality and potential financial pressures of the auto manufacturing industry result in a soft cap on IDRs at the 'A' level, although in rare cases a manufacturer with very strong business profile and unusually strong credit protection metrics could be considered for the 'A+' category. FULL LIST OF RATING ACTIONS Honda Motor Co., Ltd Long-Term Foreign-Currency IDR affirmed at 'A', Outlook Stable Long-Term Local-Currency IDR affirmed at 'A', Outlook Stable Senior unsecured rating affirmed at 'A' Short-Term Foreign-Currency IDR affirmed at 'F1' Short-Term Local-Currency IDR affirmed at 'F1' Contact: Primary Analyst Isabelle Katsumata Director +65 6796 7226 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec Tower Four Singapore 038986 Secondary Analyst Jeong Min Pak Senior Director +82 2 3278 8360 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992319 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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