CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of 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 (collectively, affiliates) at 'A/F1'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.
The rating action follows Fitch's affirmation of Toyota Motor Corporation's (TMC) ratings at 'A' with a Stable Outlook on May 28, 2015. For more information on Fitch's rating rationale, please see 'Fitch Affirms 39 North Asia Industrial Companies' Ratings,' dated May 28, 2015.
KEY RATING DRIVERS - IDR AND SENIOR DEBT
The ratings for TMCC and its affiliates are equalized and linked to those of its parent, TMC, as Fitch considers these subsidiaries as 'core' to TMC. The equalization reflects strong implicit and explicit factors including 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. Ratings also reflect TMCC's solid liquidity profile, diversified funding mix, and sound credit quality of its receivables portfolio.
Credit quality remains strong but continues to show signs of normalization. The net loss rates for fiscal year 2015 (FY15; 12 months ended March 31, 2015) and the three months ended June 30, 2015 (first quarter 2016 1Q16) were up slightly year-over-year, but losses remained low overall and favorable compared to captive finance peers, which reflects the prime nature of the portfolio. 60+ day delinquencies have also remained solid but have continued to increase slightly year-over-year through fiscal year-end 2015 (FYE15) and June 30, 2015 (1QE16). Fitch expects asset quality performance to remain strong but to normalize from current levels in 2H15 driven by an expected moderation in used car values.
TMCC continued to report solidly profitable operating results through FY15 and 1Q16, which were impacted positively and negatively by non-cash derivatives gains/losses respectively. Adjusting for these losses, the company reported pre-tax margin of 16.6% in FY15 (down from 18.6% in FY14) and 16.3% in 1Q16 (down from 19.5% in 1Q15). While TMCC's revenues continue to increase, driven by portfolio growth which has led to a higher average earning asset balance, adjusted operating margins have fallen due to an increase in credit loss provisioning and a lower effective portfolio yield. Although Fitch expects margins to continue to contract driven by a normalizing credit environment, higher interest rates and increased competition, Fitch also expects TMCC to retain robust profitability adjusted for non-cash derivatives gains/losses in FY16.
Leverage, as measured by debt to tangible equity, ended 1Q16 at 10.7x and remains high relative to peers, despite falling from a pre-crisis high of 17.8x at FYE09. Although, higher leverage is a concern, TMCC manages leverage via dividend payments to the parent and Fitch finds comfort in the ability of the company to suspend these payments, as was demonstrated in the downturn, when dividends were suspended in FY07 and FY08.
TMCC's funding profile is strong 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 primarily relies on unsecured debt for its funding needs, with unsecured long-term debt and commercial paper (CP) accounting for 87% of debt as of 1QE16. CP issuance in particular, has increased since the crisis and accounted for a material portion (29%) of debt at 1QE16, which Fitch views negatively and compares unfavorably to similarly rated peers. However, Fitch notes that TMCC's CP program is supported by sizeable liquidity back-up, including $8.9 billion in cash and marketable securities on balance sheet and $20.8 billion in committed backup credit facilities. In addition, CP is covered under the credit support agreement with the parent, TMC, which provides an additional source of backup liquidity.
A negative rating action for TMCC and its affiliates could be driven by a change in the perceived relationship between the parent and the subsidiaries, such as if Fitch believed that they had become less core to the parent's strategic operations or adequate financial support was not provided in a time of need. Additionally, the recognition of consistent operating losses, a material increase in leverage, and or deterioration in TMCC's liquidity profile could also yield negative rating action for the Parent TMC and a subsequent downgrade of TMCC and its affiliates' ratings.
Positive rating momentum for TMCC will be limited by Fitch's view of Toyota's credit profile.
Fitch has affirmed the following ratings:
Toyota Motor Credit Corporation;
Toyota Motor Finance (Netherlands) B.V.;
Toyota Credit Canada Inc.;
Toyota Finance Australia Limited; and
Toyota Kreditbank GmbH
--Long-Term Issuer Default Rating (IDR) at 'A';
--Short-term IDR at 'F1';
--Senior unsecured debt at 'A';
Toyota Finance Australia Limited
--Short-term debt at 'F1'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
Dodd-Frank Rating Information Disclosure Form