Fitch Affirms Toyota Motor Credit Corporation Ratings at 'A+'; Outlook Revised to Stable

(The following statement was released by the rating agency) Fitch Ratings-New York-04 December 2020: 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 has been revised to Stable from Negative. Key Rating Drivers The revision of TMCC's Outlook to Stable from Negative is driven by the revision of Toyota Motor Corporation's (TMC) Outlook to Stable from Negative. TMCC's and its affiliates ratings and Outlook are 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 subsidiaries and their indirect parent, Toyota Financial Services Corporation (TFSC), and in turn between TFSC and TMC. In addition to institutional support considerations, TMCC's credit profile is further supported by its historically strong profitability and a predominantly unsecured funding profile. Credit constraints include elevated leverage compared to stand-alone finance and leasing companies and above average reliance on short-term commercial paper (CP) funding relative to its peers. TMCC's asset quality remains strong, with credit metrics improving in recent years. While retail auto credit performance has been better than Fitch initially anticipated at the outset of the pandemic, auto credit losses are expected to weaken in 2021, as some of the distortions that have been supportive of strong consumer credit performance over the past six months moderate. These distortions include the massive government stimulus provided through the CARES Act, 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 demand as consumers avoided mass transit and air travel. Still, Fitch believes near-term credit performance will be highly sensitive to broader unemployment trends as well as additional stimulus measures, which in turn are likely to be driven by the ability to successfully distribute an effective vaccine to the broader population next year. TMCC's net charge-off rate on finance receivables for the first half of fiscal year 2021 (1H21; six-months ended Sept. 30, 2020) was 0.25% (annualized), down from 0.44% at fiscal year-end 2020 (FYE20; 12-months ended March 31, 2020). 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 decreased in 1H21, amounting to 0.37% at Sept. 30, 2020 compared to 0.41% at FYE20 and 0.39% at Sept. 30, 2019, which is broadly consistent with industry trends that were aided by the aforementioned factors. Operating profits remained strong in the trailing twelve months ended Sept. 30, 2020 (TTM 2Q20), with pre-tax return on average assets (ROAA) modestly below TMCC's long-term average of 1.04% between fiscal years 2014 and 2020, when adjusted for non-cash derivative gains. Fitch expects TMCC's near-term profitability to improve as loan loss provisions moderate and loan/lease originations normalize toward pre-pandemic levels. Leverage, as measured by debt to tangible equity, was 6.9x at Sept. 30, 2020, up from 6.7x at FYE20. The increase was driven by a larger amount of ABS and unsecured debt outstanding. 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 great financial crisis, to manage leverage and liquidity at the captive. TMCC did not declare any dividends in fiscal 2020. Fitch expects TMCC's leverage to remain fairly stable as improved 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 80.7% of total debt at 2Q21, which is at the higher end of its peers. Fitch believes the greater proportion of unsecured debt provides the company with meaningful funding flexibility. Short-term CP issuance has increased since the financial crisis and is higher than auto captive-finance peers. However, the proportion of CP to total debt, at face value, has decreased in the last two quarters, representing 20.7% at 2Q21, compared with a long-term average of 29% from fiscal years 2013 to 2020. TMCC's CP program is supported by $24.3 billion in committed backup credit facilities with maturities ranging from fiscal years 2021 to 2025, and $16.9 billion in cash and marketable securities held on balance sheet, which, combined, covered 187% of the $22.0 billion CP outstanding at Sept. 30, 2020. 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 face material pressures. That said, Fitch would view a decline in short-term debt favorably, as it would improve TMCC's financial flexibility and liquidity profile. Although credit markets began to experience sharp spread widening at the onset of the coronavirus pandemic, the Federal Reserve subsequently launched several programs aimed at providing liquidity support to the credit markets, including the CP and asset-backed securitization (ABS) markets. The actions by the Federal Reserve stabilized credit spreads and improved market access, particularly for investment-grade issuers and higher-quality collateral. In addition to the Fed's actions, Fitch believes TMCC's prime auto collateral and largely unencumbered balance sheet enabled the company to consistently access the various debt issuance markets post-pandemic at increasingly attractive spreads. 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. RATING SENSITIVITIES 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 continued 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. 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. 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. ESG Considerations 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. Toyota Motor Finance (Netherlands) B.V.; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A+ Toyota Kreditbank GmbH; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A+ Toyota Finance Australia Limited; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A+ Toyota Credit Canada Inc.; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A+ Toyota Credit de Puerto Rico Corporation; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Short Term Rating; Affirmed; F1 Toyota Motor Credit Corporation; Long Term Issuer Default Rating; Affirmed; A+; Rating Outlook Stable ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A+ ----senior unsecured; Short Term Rating; Affirmed; F1 Contacts: Primary Rating Analyst Michael Taiano, Senior Director +1 646 582 4956 Fitch Ratings, Inc. 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