Toyota Credit Rating--Another Quake Victim

Moody’s may rob Toyota Motor (NYSE: TM) of its Aa2 rating which would in theory make it more expensive for the world’s largest auto manufacturer to raise money.

In its comments about Toyota, Moody’s said:

The review for possible downgrade reflects Moody’s view that Toyota’s financial and operating performance will worsen in the aftermath of the March 11 earthquake and tsunami and the resulting supply chain disruptions. Toyota’s financial performance was already weak relative to expectations for the Aa2 rating level, which had been reflected in the negative outlook.

The possible change gives the Japanese government a reason to intercede in the financial future of Toyota and a number of other large Japanese companies which also will face downgrades. Business interruption will hurt the sales of international firms such as Sony (NYSE: SNE), Honda (NYSE: HMC), and Toshiba. Capital markets analysts believe that Japan’s borrowing costs will rise as it finances reconstruction of much of the northeast part of the country. The Asian nation’s debt is 200% of GDP, which already puts the rating of its sovereign paper at risk. The Japanese government needs to decide whether it can afford to allow the debt of its largest companies to be downgraded as well.

Japan’s huge corporations might have been saved from the financial effect of the quake disaster if the old keiretsu conglomerate system was still in place. Banks favored related operating companies. Operating companies under loose umbrellas favored one another in pricing. Japan now has to deal with the fact that its great businesses depend on the market and not long-standing affiliations. Moody’s take on Toyota is that its activities outside Japan are just as important as those in country. The car company faces parts shortages which will cut sales in the US, Europe, and perhaps China.

The sole solution to the debt downgrades that Japanese companies face is an intercession by the central government. It will need to back the financial status and borrowing capacity of its own publicly traded companies. Otherwise, the ripple effects will be severe. Japanese firms face capital markets which want debt yield premiums. This will hurt their competitive edges, employment, and tax-paying capacity. Japan cannot afford to see the fortunes of its largest companies flag along with its own, if the nation wants to quickly take the path to economic recovery

Moody’s and other credit rating agencies have already begun to circle Japan’s corporate giants, and for the time being, there is nothing to keep them away.

Douglas A. McIntyre