Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) for Toyota Motor Credit Corporation (TMCC) and its affiliates, Toyota Credit de Puerto Rico Corporation (TCPR), Toyota Motor Finance (Netherlands) B.V., Toyota Credit Canada Inc., Toyota Finance Australia Limited and Toyota Kreditbank GmbH (collectively, affiliates) at 'A+' and 'F1', respectively.
The Rating Outlook is Stable.
Key Rating Drivers
The ratings for TMCC and its affiliates are equalized with and linked to those of its parent, TMC, as Fitch views the issuers as core subsidiaries of TMC. This view reflects strong implicit and explicit support factors including the financing of a high percentage of TMC sales by the subsidiaries, significant operational linkages between the companies, and the existence of a credit support agreement between the parent and the subsidiaries.
In addition to the institutional support considerations, TMCC's credit profile is further supported by its strong asset quality, solid profitability and a predominately unsecured funding profile. Credit constraints include elevated leverage relative to peers and higher usage of CP funding.
TMCC's asset quality remains strong, with credit metrics improving in recent years. Industry wide, retail auto credit performance has been strong over the last year relative to historical levels, but is expected to begin normalizing in 2022 as some of the pandemic-driven distortions that have been supportive of exceptionally strong consumer credit performance moderate. These distortions include the unprecedented amount of government stimulus aimed at combating the impact of the pandemic, widespread lender forbearance/deferral programs, a curtailment of consumer discretionary purchases that has resulted in significantly higher savings rates, and a post pandemic surge in used vehicle prices.
TMCC's net charge-off rate on finance receivables for the first half of fiscal year 2022 (1H22; six-months ended Sept. 30, 2021) was 0.17% (annualized), down from 0.25% in the same period a year earlier. TMCC's credit losses continue to compare favorably with auto captive finance peers, reflecting the prime nature of the portfolio. Delinquencies of 60 days or more on finance receivables ticked up slightly during 1H22, amounting to 0.39% at Sept. 30, 2021 compared with 0.37% in the year prior, but remain low compared with the historical range.
Operating profits strengthened in the trailing twelve months ended Sept. 30, 2021 (TTM fiscal 2Q22), primarily driven by higher gains on lease residual values and a decrease in provisions for credit losses. Pre-tax return on average assets (ROAA) ended the period at 2.47%, well above TMCC's average of 1.16% between fiscal years 2014 and 2021, when adjusted for non-cash derivative gains. Fitch expects TMCC's profitability to remain strong in 2022 as loan/lease origination volumes increase towards pre-pandemic levels and elevated used vehicle prices extend into next year due to strong consumer demand and continued supply constraints resulting from the semiconductor chip shortage.
Leverage, as measured by debt to tangible equity, was 6.5x at Sept. 30, 2021, down from 7.0x at FYE21. During this period, total debt outstanding increased modestly while TMCC's earnings exhibited stronger growth, driving its capital levels higher. Historically, TMCC has managed leverage via dividend payments to the parent, and Fitch believes the parent would suspend these payments, as was demonstrated during the global financial crisis, to manage leverage and liquidity at the captive. During FY21, TMCC paid dividends to its parent of $700 million or 35% of net income. This compares with a payout ratio of 1% in FY20, relating to a $10 million dividend under an asset purchase agreement. Fitch expects TMCC's leverage to remain fairly stable as retained earnings support moderate asset growth.
TMCC's funding profile is primarily unsecured 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's unsecured debt represented 75.8% of total debt as of 2Q22, down slightly from 80.7% a year prior, but remains at the high end of peers. Fitch believes TMCC's proportion of unsecured debt provides the company with meaningful funding flexibility.
TMCC's issuance of short-term CP has continued its downward trend since FY20 but still remains higher than auto captive-finance peers. The proportion of CP to total debt, at face value, decreased to 15% as of 2Q22, compared with a long-term average of 27% from fiscal years 2013 to 2021. TMCC's CP program is supported by $24.6 billion in committed backup credit facilities with maturities ranging from fiscal years 2022 to 2025, and $14.3 billion in cash and marketable securities held on balance sheet, which, combined, covered 229% of the $17.0 billion CP outstanding at Sept. 30, 2021.
CP is also covered under the support agreement with TMC, which provides an additional source of backup liquidity if needed. Fitch views TMCC's substantial liquidity position favorably, as it provides the company with additional support should the CP market become inaccessible. Fitch views the decline in short-term debt favorably, as it improves TMCC's financial flexibility and liquidity profile.
The CP rating is equalized with TMCC's Short-Term IDR, which in turn is equalized with the short-term IDR of its ultimate parent, TMC. Both the long-term and short-term IDRs of TMCC and its affiliates are equalized with TMC's ratings.
Factors that could, individually or collectively, lead to positive rating action/upgrade are largely dependent on TMC's ratings and Outlook, given the rating linkage. TMCC's ratings are expected to move in tandem with its parent, although any change in Fitch's view on whether TMCC remains core to its parent could change this rating linkage. Fitch cannot envision a scenario where TMCC would be rated higher than its parent.
Factors that could, individually or collectively, lead to negative rating action/downgrade are largely dependent on TMC's ratings and Outlook, given the rating linkage. However, meaningful and sustained credit quality deterioration, the recognition of consistent operating losses, a material increase in leverage above average post-crisis levels, a material increase in the proportion of short-term debt in the funding structure and/or deterioration in TMCC's liquidity profile could also lead to negative rating action.
The CP ratings are primarily sensitive to changes in the short-term IDR and would be expected to move in tandem. The unsecured debt rating is primarily sensitive to changes in the long-term IDR and would be expected to move in tandem. However, a material increase in the proportion of secured funding could result in the unsecured debt rating being notched down from the IDR.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
TMCC and its affiliates' ratings and Rating Outlook are linked to those of the parent, Toyota Motor Company.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.