DBRS Confirms Honda Motor Co., Ltd. at A (high) with a Stable Trend

DBRS Limited (DBRS) confirmed Honda Motor Co., Ltd.’s (Honda or the Company) Issuer Rating at A (high) and Honda Canada Finance Inc.’s Senior Unsecured Debentures and Commercial Paper ratings at A (high) and R-1 (middle), respectively. All trends are Stable. The confirmations reflect the Company’s strong business risk assessment as an automotive original equipment manufacturer (OEM) with moderate global scale — albeit with strong technological capabilities — with Honda also deriving diversification benefits from its motorcycle and financial services operations.

Honda’s earnings have been subject to volatility related to the vehicle-airbag-recall crisis at Takata Corporation in addition to gains resulting from pension plan amendments. However, absent these items, DBRS notes that the Company’s consolidated operating margins have remained roughly constant, with sales gains and a firmer product mix being considerably offset by increased selling, general and administrative expenses and higher research and development costs. Honda’s automotive sales remain highly dependent on its core models (namely, the Accord, Civic, CR-V, Vezel/HR-V and Fit/Jazz) that collectively accounted for approximately 70% of its global unit sales in 2016. DBRS notes that this strong proportionate representation benefits Honda, as each of its core models are very competitive in their respective vehicle segments. Moreover, in the North American market, the Company is increasing its supply of important regional models (such as the Pilot, Odyssey and Ridgeline, as well as the Acura MDX) to increase its participation in consumers’ ongoing shift toward crossover-utility vehicles/sport-utility vehicles. Regarding alternative powertrains, Honda continues to use a multi-pronged approach consisting of internal combustion engines, hybrids, battery electric vehicles (BEVs) and fuel cell vehicles (FCVs); this is exemplified by its new Clarity model, which can be configured in either a plug-in hybrid, a BEV or an FCV configuration.

Going forward, DBRS anticipates that Honda’s F2018 (ended March 31, 2018) will be slightly improved year over year and subject to moderate growth over the medium term. This assessment incorporates modest global industry-growth assumptions, with Honda aiming to further develop its recent progress in China. While the Company faces ongoing cost headwinds in the form of new mobility initiatives and tightening emissions requirements, Honda is seeking to control associated costs by way of its increasing participation in joint projects and technical/business alliances with other third parties.

The Company’s rating is expected to remain constant over the near to medium term. DBRS sees limited potential for additional positive rating actions over the foreseeable future given the high level of the current rating compared with the industry average, with DBRS also taking into account Honda’s relatively modest scale vis-à-vis the world’s largest OEMs. Conversely, while future earnings underperformance and associated cash burn could potentially result in negative rating pressure, DBRS considers this scenario unlikely.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The ratings for Honda Canada Finance Inc. are supported by Honda through a keepwell agreement.