TOKYO (Bloomberg) -- Toyota Motor Corp.'s credit rating was cut Thursday by Moody's Investors Service, and Fitch Ratings said it may also downgrade the world's biggest carmaker as recalls of more than 8 million vehicles ravage profit.
The rating was reduced to Aa2, the third-highest grade, from Aa1, according to a statement from Moody's, which stripped Toyota of the top Aaa rating last year. Fitch will examine the company's creditworthiness and a downgrade is a “possibility,' senior analyst Jeong Min Pak said in an interview.
Toyota faces at least 180 consumer and shareholder lawsuits stemming from recalls due to unintended acceleration and may suffer $2 billion in lost sales and warranty repairs. The company recalled its Lexus GX 460 SUV and agreed to pay a record $16.4 million U.S. fine this month, further tarnishing its reputation for safety under President Akio Toyoda.
Increased costs related to the recalls “will hurt Toyota down the road,” said Pearlyn Wong, an investment analyst in Singapore at Bank Julius Baer Co., which manages about $350 billion worldwide. “Litigation costs are very hard to model.”
Toyota faces a “material risk” that its operating profit margin will remain well below what is appropriate for its rating “until 2012 at the earliest and possibly beyond,” Moody's analyst Tadashi Usui wrote.
Fitch will examine Toyota “closely” in the next six months, said Jeong Min Pak, a senior director at the company, by phone from Seoul.
Separately, Moody's also downgraded Denso Corp.'s credit rating to Aa3 from Aa2. Denso, which is 22.54 percent owned by Toyota, produces electronic and other parts for automobiles.
"Denso will continue to strive to heighten its company value by meeting our customers needs," the world's second-largest auto parts supplier said in a statement released today.
Bonds and loans
A lower credit rating indicates a higher risk of a default and can raise borrowing costs. The carmaker has 5.45 trillion yen of bonds and loans coming due through 2012.
“We are deeply disappointed with the Moody's downgrade,” said Mieko Iwasaki, a Toyota spokesman in Tokyo. “We are doing our utmost in prioritizing our customers' trust with our best management efforts and hope to have our rating raised again.”
The company's shares fell 1.4 percent to close at 3,600 yen in Tokyo.
Standard & Poor's
Standard & Poor's will decide by the middle of next month whether to reduce or affirm its credit ratings on Toyota, Chizuko Satsukawa, a Tokyo-based analyst for the ratings company, said in a phone interview.
S&P put the automaker's “AA” debt rating put under review in February with “negative” implications, citing concerns over quality-related issues.
Sluggish demand, overcapacity, the need to provide incentives beyond normal levels to boost sales and “a real risk that its product quality problems have eroded significantly and permanently its historical advantages in pricing power,” could all negatively affect Toyota's profitability, Moody's Usui wrote.
The carmaker in March started offering no-interest loans, discount leases and free maintenance for U.S. customers.
Toyota has predicted it will post net income of 80 billion yen ($862 million) for the year ended in March 31. The company will report full-year earnings on May 11.