Business And Leadership: Moody’s says it may downgrade Toyota’s credit rating

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Moody’s says it may downgrade Toyota’s credit rating

09.02.2010
Global credit-rating agency Moody’s has said it could downgrade Toyota’s rating over concerns that the growing scale of the company’s product recalls could damage its brand equity, pricing power and market share in key markets.

Moody’s said today that it had placed Toyota’s Aa1 unsecured long-term credit rating under review for possible downgrade.

The rating agency said it was concerned that Toyota's product problems and recalls raised “significant risk” that the recovery in the company's earnings may not continue or will be at a much slower pace than originally thought.

Prius recall
Toyota today announced a global recall of almost half a million of its third-generation electric-hybrid car, the Prius, and related vehicles. This is in addition to a global recall of some eight million vehicles due to problems with sticking accelerator pedals and slipping floor mats.

“Moody's is concerned that these problems may significantly damage Toyota's brand and its reputation for high product quality over the medium to long term,” the rating agency said.

Problems if recalls persist
However, in Moody’s view, if the recall issues expand or persist, Toyota's weak earnings may continue for the medium to long term because of “the additional costs for dealing with the recall, as well as immediate quality control issues, a decline in its share in major markets, a delay in the recovery of unit sales, and downward pressure on vehicle prices”.

“This, in turn, raises considerable uncertainty as to the operating and financial profile of the company in the coming year and possibly beyond,” it added.

Abundant liquidity
However, Moody’s acknowledged what it described as Toyota's “abundant liquidity”, which it said loaned the company “an extremely high degree of financial flexibility”.

“Thus, Moody's believes that the company's balance sheet will be able to absorb related costs,” the rating agency added.

Moody’s said its review would focus on Toyota’s progress in dealing with the immediate implications of its current problems as well as longer term issues.

“In particular we will focus on the likely range of costs for the recalls and to defend against litigation, and the likely magnitude and duration of the impact on vehicle sales and prices,” it added.