Recalls Cost Toyota a Credit Grade Cut

Recalls Cost Toyota a Credit Grade Cut

By Michelle Krebs April 22, 2010

Credit-rating service Moody's cut its grade on Toyota Motor Corp. based on its prediction that the Japanese automaker faces a long profitability slump coupled with potentially expensive lawsuit costs from its multiple vehicle recalls around the globe.

It marked Toyota's lowest credit rating ever, and it was yet-another piece of bad news in yet-another week of bad news for Toyota.

Earlier this week, Toyota agreed to pay a record $16.4 million fine levied by the National Highway Traffic Safety Administration (NHTSA) for delaying action on sticky accelerator pedals that resulted in a recall of 2 million vehicles in the U.S. alone.

Within hours, Toyota also issued a recall for its Lexus GX 460 following a "don't buy" recommendation from Consumer Reports magazine, which claimed the slow response of the vehicles electronic stability control system could lead to a rollover accident.

The recalls of the Lexus SUV came on the heels of Toyota's recall of 870,000 minivans in the U.S. and Canada for spare tires that could fall off the vehicle due to a corroding cable.

Not Making the Credit

In addition to noting the cost of recalls and the hit on profits, Moody's, lowering its rating of Toyota, said the automaker was at the for product quality problems significantly and permanently eroding Toyota's historical advantage of pricing power. Moody's said Toyota's profits could be hurt through 2012 by the recall mess.

A cut in credit rating makes it more expensive for a company to borrow money. For Toyota, Moody's downgrade makes it more costly to obtain funding and service its $36 billion in outstanding debt, most of which matures between 2010 and 2012, according to Thomson Reuters data. Moody's cut Toyota's rating from Aa1 to Aa2 and left open the possibility of a further downgrade in the future.

In addition, other credit rating agencies, including Standard & Poor's and Fitch, are considering a cut as well.

Toyota said it was disappointed in the rating downgrade but is making utmost efforts to restore customer confidence.

Moody's also downgraded the credit rating of automotive electronics and parts supplier Denso Corp., as it is 22.5 percent owned by Toyota.

 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.