TMCC: taking caution to good effect

Toyota Motor Credit Corporation (TMCC), the wholesale and retail financing company that supports Toyota’s North American sales activities, is unique among the big automotive companies’ captive financing vehicles. It has a triple-A rating from Standard & Poor’s and Aa1 from Moody’s, far superior to those of its big three competitors, Ford Credit, DaimlerChrysler Financial Services and GMAC, the highest rated of which, DaimlerChrysler Financial Services, is on a low single-A.

TMCC has also maintained those ratings consistently for over five years, no small achievement when other automotive captives’ ratings have fluctuated through the cyclical ups and downs of the parents’ businesses.

This is particularly impressive when sales in the US automotive market have been falling for the past 12 months and doubly so considering that TMCC has a Japanese parent.

This has been achieved through the sort of extremely cautious financial management that is hardly seen at any other companies and by managing the business and its balance sheet to sustain high credit ratings. Shareholder equity at the beginning of last December was $54.5 billion, there was cash and marketable securities of $28 billion on the balance sheet and its debt-to-equity ratio was, astonishingly, less than one.

TMCC is run so that its borrowing needs are small compared with its peers. The company only did $11.5 billion of long-term funding in 2002 and only has $10 billion to $12 billion of borrowing requirements for 2003. “The only significant change will be that there will be a bit more emphasis on global transactions as we migrate to larger deals,” David Tademaru, head of term funding at Toyota Motor Credit, told a recent credit conference. Only 4% of its bond issues were global deals last year. TMCC also sticks to relatively short-dated bonds, in the one- to five-year maturity range.

Scarcity value makes TMCC’s bond issues popular with investors. “Toyota Motor Credit don’t have a huge amount to issue, but when they do, they do it well,” says Ian Platt, deputy global head of syndicate at Dresdner Kleinwort Wasserstein, who worked on a couple of Toyota Motor Credit’s issues in 2002. But he adds that other factors show TMCC to be a savvy issuer. “True, their bonds have scarcity value but they have huge retail appeal, are well priced, well managed and perform well in the secondary market. I’ve worked on euro and dollar deals for them and without exception they’ve been heavily oversubscribed.”

However, some analysts argue that TMCC is too prudent – a rare criticism at a time when many overleveraged corporates are struggling to repair their balance sheets and conserve cash. Investors have questioned whether it is wise to have as much as $28 billion of cash sitting on TMCC’s balance sheet, when some of it could be returned to shareholders. “You could say that from a pure shareholder perspective this is not the optimal capital structure,” admitted Tademaru, “but we’re always looking at our cash position.”

He argued that there are significant disadvantages to using up surplus cash on the balance sheet. “Some of our peers diversify into other businesses or dividend out cash in good times and then in downturns they don’t have the money for research and development. Ford is without a whole lot of product at the moment.”

Platt attributes TMCC’s success as an issuer to the state of its balance sheet and the ratings that it keeps and maintains. But the company is not content with these either. Toyota Motor Credit met the rating agencies in December, with a view to pitching the strength of its credit. “We think we’ve got a shot of an upgrade by Moody’s,” said Lloyd Mistele, head of treasury.

It didn’t obtain the upgrade that it was looking for this time around, but there’s not much higher you can go from AAA/Aa1.