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Rating Action:

Moody's affirms Honda's A1 rating; changes outlook to negative

 The document has been translated in other languages

18 May 2016

Tokyo, May 18, 2016 -- Moody's Japan K.K. has affirmed Honda Motor Co., Ltd.'s A1 issuer rating and Prime-1 commercial paper rating, as well as its subsidiaries' A1 senior unsecured and Prime-1 ratings. At a same time, Moody's changed the outlook to negative from stable.

The outlook change follows the company's announcement of its results for the fiscal year ended March 2016 (FYE3/2016) and its forecasts for FYE3/2017.

Moody's notes that Honda's profit declined in FYE3/2016, due largely to provision expenses related to recalls of airbag inflators manufactured by Takata Corporation (unrated).

The negative outlook is being driven by Moody's expectation that the company's cash flow will be pressured over the next few years from delayed payouts for the repair costs related to the recalls.

This situation will restrict Honda's ability to make new investments, which may in turn disadvantage the company, given that the rapid evolution of the auto industry requires constant innovation to stay competitive.

The negative outlook also reflects (1) the additional risks that may arise from litigation and civil penalty related to the recall; (2) the limited but remaining risk of a further expansion of the recall exercise; and (3) the difficulty of transitioning to new suppliers for the non-inflator components of the airbags it uses, in Moody's opinion.

At the same time, Moody's assumptions on profitability and leverage support the ratings affirmation.

Moody's expects that profitability will recover in FYE3/2017, as most of the expenses related to the recalls were already recognized by FYE3/2016. Furthermore, Moody's also expects leverage -- as measured by debt/EBITDA -- to remain adequately positioned for the rating.

A full list of affected ratings, which include its subsidiaries, is provided at the end of this press release.

RATINGS RATIONALE

Honda's adjusted EBITA margin for FYE3/2016 -- excluding its financial services business -- decreased to 3.5% from 5.6% a year ago, largely due to the increase in general and administrative expenses, which included product warranty expenses for the airbag inflators manufactured by Takata Corporation.

Delayed cash payments for repair costs -- which occur as Honda car owners bring their vehicles for repair -- will likely weigh on cash flow, although Honda had recorded provision expenses for most of such recalls by FYE3/2016.

Moody's expects that free cash flow (after subtracting dividends) could become negative and trend at that level during the next 2-3 fiscal years, leading to elevated levels of total debt -- relative to historical levels -- for Honda's automotive business.

The lower level of cash flow may also constrain the level of capital expenditure that Honda needs to spend for the next 2-3 fiscal years to improve production efficiency and enhance its competitiveness in the global automotive industry.

Honda may be required to take on some portion of the litigation and fines related to the recalls -- which would add additional pressure to its profit and cash flow -- although Takata would be responsible for most of these costs.

Moody's recognizes that Honda announced in November 2015 that it would stop using airbag inflators made by Takata, thereby capping its potential product warranty expenses. However, with regard to the non-inflator components of the airbag module, it may not be easy for Honda to switch to new suppliers over a short period if Takata ever became unable to supply such components, in Moody's opinion.

At the same time, Moody's expects that leverage, as measured by debt/EBITDA, will remain well below the downgrade guidance of 2.5x, based on the originally low level of total debt. For FYE3/2016, leverage stood at 1.2x.

The expected margin recovery from FYE3/2017 will also support an improvement in EBITDA and in leverage, once Honda has expensed a substantial part of its Takata-related provisions costs, including those for additional recalls in the US, as announced in May 2016.

Retained cash flow (RCF)/debt was also strong at 57.4% for FYE3/2016 and is expected to trend at favorable levels to support the A1 rating.

If Honda can recoup some of its product warranty expenses from Takata after current negotiations end, it could reflect positively on Honda's future cash flow. However, we have not incorporated such a scenario in our current assumptions, given uncertainty over both the amount and Takata's ability to execute on such payments.

Moody's does not expect that Honda will inject money into Takata despite their long history of co-developing airbags and its position as Takata's six-largest shareholder with a 1.2% holding. However, if Honda takes on additional expenses to support Takata or bears substantial payments for recall-related lawsuits or penalties, it would reflect negatively on its ratings.

The rating would face downward pressure if Honda's adjusted EBITA margin deteriorates to below 5% and debt/EBITDA increases to above 2.5x on a sustained basis.

If we determine that Honda's competitiveness will be compromised by a discontinuation in the supply of components from Takata or the implementation of a lower level of investment, it may reflect negatively on the rating.

Depending on Moody's assessment at the time, the rating could also be affected by a change in the rating or outlook of the Government of Japan (GoJ), given that they both have the same A1 rating.

In view of Honda's current profitability, it is unlikely that upward pressure on the ratings will increase in the near future. However, the rating could be positively influenced if the company's adjusted EBITA margin is consistently above 10% and if debt/EBITDA falls below 1.0x, while it maintains its liquidity and product mix.

The methodologies used in these ratings were Global Automobile Manufacturer Industry (Japanese) published in August 2011, and Captive Finance Subsidiaries of Nonfinancial Corporations (Japanese) published in April 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Honda Motor Co., Ltd. is one of Japan's leading automobile manufacturers, as well as the world's largest manufacturer of motorcycles. Honda sold 17.06 million motorcycles and 4.74 million cars in FYE3/2016 on a group basis.

Affected Ratings are listed below.

Honda Motor Co., Ltd.

Outlook: changed to Negative from Stable

Ratings Affirmed

- Issuer Rating: A1

- Commercial Paper: P-1

Honda Finance Co., Ltd.

Outlook: changed to Negative from Stable

Ratings Affirmed

- Backed Senior Unsecured Debt: A1

- Backed Senior Unsecured Shelf: (P)A1

- Backed Commercial Paper: P-1

American Honda Finance Corporation

Outlook: changed to Negative from Stable

Ratings Affirmed

- Backed Senior Unsecured Debt: A1

- Backed Senior Unsecured MTN Program: (P)A1/(P)P-1

- Backed Commercial Paper: P-1

Honda Canada Finance Inc.

Outlook: changed to Negative from Stable

Ratings Affirmed

- Backed Senior Unsecured Debt: A1

- Backed Commercial Paper: P-1

Honda Bank GmbH

Ratings Affirmed

- Backed Commercial Paper: P-1

Honda Finance Europe Plc

Ratings Affirmed

- Backed Commercial Paper: P-1

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's Japan K.K. is a credit rating agency registered with the Japan Financial Services Agency and its registration number is FSA Commissioner (Ratings) No. 2. The Financial Services Agency has not imposed any supervisory measures on Moody's Japan K.K. in the past year.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Motoki Yanase
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100

Moody's affirms Honda's A1 rating; changes outlook to negative
No Related Data.
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