Friday, 17 August 2018

IFR Top 250 2007: Triple A power

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Taken together, all the debt issued by Toyota Financial Services many subsidiaries around the world make it one of the globe’s top borrowers. The US entity Toyota Motor Credit Corp is the dominant entity but the Japanese business is also expanding the scope of its activities. Atanas Dinov reports.

Toyota Motor Corp (TMC) has reason to celebrate in 2007. This year is the car manufacturer’s 70th anniversary and the 50th since it exported cars to the US for the first time. It is also the year that Toyota became for the first time the world’s biggest seller of cars, overtaking General Motors of the US in sales in the first quarter of the year.

Another reason for celebration is the company’s record operating income of ¥2.23trn (US$18bn) in 2006, which made it the first Japanese company to bring in annual profit of more ¥2trn.

Clearly in the modern car industry that volume of sales is only possible thanks to a financing arm. In TMC’s case that entity is wholly owned Toyota Financial Services (TFS). Hideto Ozaki, TFS’s president, highlighted the difference between the parent, an industrial company, and TFS – a finance company that supports the parent’s products.

TFS’s core services span retail financing, leasing, dealer financing, and credit card services. It operates via subsidiaries in 31 countries.

TFS (and its subsidiaries) are Triple A rated (higher than the ratings given by S&P and Fitch to Japan itself) and this gives it easy access to cheap funding which it then on-lends – a very profitable proposition.

There is a credit support agreement between TFS and its issuing subsidiaries. The same agreement is in place between the parent TMC and TFS.

The dominant subsidiary is clearly Toyota Motor Credit Corp (TMCC), TFS’s US entity. TMCC between 1 May 2006 and 30 April 2007 issued US$19bn of debt, including securitisations. Its profitability is also enhanced by US regulations that require auto-manufacturers to have a leasing arm to provide finance for their vehicles – something which provides it with a “license for them to print money”, said Christopher Richter, an analyst from CLSA.

In 2006 more than one third of Toyota’s sales were in North America. Toyota is expanding rapidly in the US. It is currently constructing a US$1.3bn assembly plant in Mississippi, with another plant being built in Ontario that is expected to open next year. It is also enlarging its Baja California, Mexico factory. Elsewhere, TMC has expansion plans for Russia, Thailand and China.

The Japanese subsidiary, Toyota Finance Corporation (TFC , itself is also a significant borrower. In fiscal 2006, the company issued US$1.8bn of uridashi debt targeting domestic institutional and private investors in Japan. TFS officials said that uridashi bonds, first issued abroad and then brought to Japan for secondary public offerings, had easier documentation, compared to domestic bonds. Ozaki stressed that the euro market remains one of the main priorities.

The preferences of TFS are short-term, three to ten-year assets. Ozaki stressed that risk management needs to be strong. “Although TFS is not afraid of taking risk, we aim to reduce exposure to extra long-term assets such as mortgages in our balance sheets, because of balance sheet management and asset-liability management,” Ozaki said. TFC is about to undertake its maiden voyage into the RMBS sector which is expected by the end of June 2007. The deal is ¥45.3bn senior beneficial interests, with provisional Triple A ratings.

Other TFS entities also access Japan’s debt market. For example, TMCC and Toyota Finance Australia sold uridashi bonds (bonds denominated in various currencies, yen included, aimed at Japanese domestic retail investors) totalling US$3.4bn and US$800m respectively.

TMC itself is not a prolific borrower. Its most recent bond came in August 2002 in the form of a ¥150bn domestic note with a 10-year maturity that paid a 1.330% coupon payment. This currently trades at the equivalent of five-year JGBs plus 14bp–15bp in the secondary markets. That compares to Honda’s bonds maturing 2012 which are trading at around 10bp–13bp over JGB’s and 16–19bp over for Nissan.

TMC is unlikely to return to the markets on its own account soon. While it has aggressive expansion plans, they will be funded by the huge amounts of cash the business throws off, rather than via the debt markets.

Meanwhile, with the growing popularity of ecologically friendly and more fuel-efficient cars, Toyota’s focus on hybrid vehicles could turn out to be a cornerstone of future success.

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