The downgrade reflects Moody’s concern that it would take some time for Toyota to recover its previous strong profitability, and its competitive strength will remain under pressure for a prolonged period in view of challenging market conditions.
Moody’s also said it continues its review of Toyota’s ratings for possible further downgrade because its final ratings incorporate one notch of support from the country’s banks and government, which are themselves under review for possible downgrade.
However, Moody’s also said that the ‘Aa3 ratings’ incorporate the faster-than-expected recovery in Toyota’s production levels following supply chain disruptions and power shortages because of the March 11 earthquake.
And Moody’s added that it believes ‘Toyota’s strong ability to reduce its cost base will continue to mitigate to some extent the negative market environment’.
The ratings agency said that it anticipates that Toyota’s profit recovery will not be as strong as preferred because of its ‘weakening market shares in various regions worldwide, the strong yen (now 80-85 yen per dollar), and high raw material prices’.
Moody’s noted that the competitive climate [for Toyota] has become more intense due to the success of Korean automakers, the revival of US makers, and the growing momentum of German makers. In particular, in the lower end segment, Moody’s said it ‘understands that Toyota’s strategic expansion has been slower than its rivals’.