By Yuki Hagiwara and Takako Iwatani May 25 (Bloomberg) — Toyota Motor Corp. , the world’s largest carmaker, will have insufficient profit to warrant an upgrade of its credit rating this fiscal year, Moody’s Investors Service said. Toyota, which Moody’s rates the highest among global carmakers at Aa2, needs an annual operating profit of 1 trillion yen ($11 billion), more than triple its outlook for this year, before it can be considered for a higher rating, Tadashi Usui , senior analyst at the credit rating company , said in an interview in Tokyo. It also needs an operating margin of 5 percent, he said. Moody’s and Standard & Poor’s began cutting Toyota’s rating last year after the carmaker posted the first of three straight quarterly losses. Usui said recalls of more than 8 million Toyota vehicles worldwide in the past year have damaged the company’s reputation, threatening to slow an earnings rebound. “I cannot say confidently that Toyota’s operating profit will recover smoothly,” Usui said. Toyota fell 1.9 percent to 3,300 yen as of the 12:50 p.m. trading break in Tokyo, while the benchmark Nikkei 225 index fell 3.1 percent. The automaker has declined 15 percent so far this year. Profit Outlook Operating profit may increase 90 percent this fiscal year to 280 billion yen, from 147.5 billion yen in the 12 months ended March 31, the carmaker said May 11. The forecast is almost 90 percent smaller than the record 2.27 trillion yen Toyota posted in the year that ended in March 2008. Moody’s downgraded Toyota’s credit rating last month to Aa2, its third highest level, with a negative outlook, from Aa1. The automaker lost its top Aaa rating in February 2009. Toyota has about 5 trillion yen of debt maturing by the end of 2012, with 1.09 trillion yen due in 2010, according to data compiled by Bloomberg. Standard & Poor’s, which also rates Toyota’s debt at its third-highest grade, AA, removed the company from its “Credit Watch” list on May 14. The outlook may be raised to “stable ” from “negative” in the next one or two years, should Toyota’s recovery in profitability become clearer, Chizuko Satsukawa , a Tokyo-based analyst at S&P said today. ‘Gradual Recovery’ Fitch Ratings has Toyota on “rating watch negative,” according to Senior Director Jeong Min Pak . “We believe the company will still show gradual recovery, especially with our expectation of modest recovery in U.S. auto demand this year,” Pak said. “However, the scope of the recovery and profitability is expected to lag behind other Japanese makers.” Toyota’s earnings recovery may also be slowed by the introduction of better cars by rivals Hyundai Motor Co. and Ford Motor Co. in the U.S., traditionally the most profitable market for Japanese automakers, Usui said. Toyota also has excess capacity in the U.S., he said. Moody’s raised Ford’s credit rating to B1 from B2 on May 18. Toyota also faces at least 180 consumer and shareholder lawsuits in the U.S. stemming from vehicle recalls for defects linked to unintended acceleration. The National Highway Traffic Safety Administration fined Toyota a record $16.4 million last month for not promptly notifying it of the pedal defect. ‘Good Lesson’ Toyota President Akio Toyoda said May 22 that scrutiny from inside and outside the company has been a “good lesson” for Toyota, and he expects the carmaker to emerge stronger after the recalls. The difference in yield on Toyota’s 1.772 percent notes due June 2019 and government bonds of similar maturity narrowed to 20 basis points yesterday, matching the lowest since the automaker issued the debt, according to Japan Securities Dealers Association prices on Bloomberg. A basis point is 0.01 percentage point. Credit-default swaps tied to Toyota debt due in 5 years declined 3 basis points to 87 basis points yesterday, according to CMA DataVision prices in New York. The contracts, which reflect market perceptions of creditworthiness, traded at 50.5 basis points on April 16, this year’s lowest. Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Competitors Honda Motor Co. and Nissan Motor Co., Toyota’s largest Japanese competitors, must also increase profitability before Moody’s will consider raising their credit ratings, Usui said. For Honda, Japan’s second-largest automaker, an operating margin of 7 percent is necessary before Moody’s will consider raising its A1 rating, while a margin of less than 5 percent may trigger a downgrade. At Nissan, the nation’s third-biggest carmaker, an operating margin higher than 5 percent is the minimum necessary for Moody’s to consider raising the current Baa2 rating, Usui said. Rising raw-material prices and a strengthening yen also pose risks for Japanese carmaker earnings, he said. To contact the reporter on this story: Yukiko Hagiwara in Tokyo at Yhagiwara1@bloomberg.net
