TOKYO: Japanese auto giant Toyota suffered a fresh setback on Friday when ratings agency Standard & Poor's said it had downgraded the carmaker to "AA-" from "AA" citing "weak profitability".
The dropping of Toyota's long-term corporate credit and senior unsecured debt ratings comes as the world's biggest automaker attempts to rebuild a reputation damaged by millions of recalls worldwide over safety issues. "Toyota's profitability has been recovering, but it is still weak and is improving at a slower pace than the profitability of its Japanese peers", Standard & Poor's said in a statement. The agency said it had lowered its long-term ratings on Toyota to "AA-" from "AA" because the automaker's profitability "in the next one to two years is unlikely to recover to a level appropriate for the rating."
It added that Toyota's "profitability might remain under pressure from higher raw material prices and gasoline prices as well as the strong yen."
In February the maker of the popular Prius hybrid reported a 39 percent fall in third quarter net profit year-on-year as sales slipped and operating profit tumbled at a time when the yen hit 15-year highs versus the dollar.
However, the car giant raised its annual net profit forecast to 490 billion yen from an earlier 350 billion yen. Japan's automakers have returned to profitability since the financial crisis but a pick-up in demand has been overshadowed by the impact of the strong yen, making their products more expensive overseas and eroding profits. The expiry in September last year of Japanese government subsidies to encourage consumers to buy more environmentally friendly cars has also weighed on the nation's automakers, hitting domestic demand. "The yen's appreciation and the termination of government subsidies for new car buyers led to a 48% year-on-year drop in operating income to 99 billion yen ($1.19 billion) -- a relatively large drop compared with the performance of peers," S&P said of Toyota. In 2008 Toyota ended General Motors' 77-year reign as the world's largest automaker but the crown has sat uneasily as the Japanese giant has battled the impact of the economic crisis, the recalls and the soaring currency.
Previously lauded for its safety, Toyota became mired in crisis when it recalled nearly nine million autos between late 2009 and February last year due to brake and accelerator defects alleged to have caused dozens of deaths.
The crisis dealt a huge blow to the firm's reputation, prompting predictions it would lose market share as it tightened its recall policy to encompass around 16 million vehicles between late 2009 and January this year.
S&P said the outlook on Toyota's new rating is stable, saying that the carmaker is likely to maintain a gradual recovery in its profitability and cited the company's "minimal financial risk profile." It added that the company has a "very strong" capital structure and "exceptional liquidity". The rating reflects what the agency calls a "very strong capacity" for a company to meet its commitments. In April last year ratings agency Moody's downgraded Toyota to Aa2, the third-highest on a scale of 19, saying uncertainty over "product quality" following mass recalls raised questions over its profitability.
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