Credit Rating Downgrade: Honda Motor
20.05.12
By one notch to A from A+ based on the firm's ongoing weak operating performance. Honda is amid posting double-digit sales declines in its manufacturing operations in three of the past four years, resulting from the impact of the Japan earthquake and tsunami, supply disruptions from the Thailand flooding, and the strong yen. That said, Honda's ratings benefit from its strong liquidity and somewhat more diversified product portfolio relative to some of its peers, considering that motorcycles continue to represent almost 20% of manufacturing sales. The firm's Business Risk score also encompasses Honda's impressive size and focus on producing vehicles in its end markets rather than relying on exports, as some of its rivals do, which has allowed it to manage through the recent downturn while generating operating profits.
Honda typically maintains cash that exceeds total industrial company debt outstanding. In part due to this and our forecast for healthy free cash flow generation, Honda's Cash Flow Cushion score is solid. The company continues to use free cash flow for dividends although we expect the firm to retain strong cash balances to invest in the business and maintain financial flexibility in the face of uncertain global markets. The rating is also supported by Honda's strategy of slow and steady growth, which has allowed it to avoid some of the mistakes of its competitors. This should allow the firm to continue to manage through the cyclical and competitive risks facing the auto industry. The Solvency Score captures the strong balance sheet, although returns on invested capital and interest coverage remain fairly weak due to the recent downturn. We expect a strong recovery in operating profit in fiscal year-end 2013 to return these measures to more typical levels and support the credit rating.
Source: Toronto Star