Impact: Moody’s changes Honda’s rating outlook to negative image

Moody’s Japan K.K. has changed to negative from stable its outlook for the A1 the senior unsecured long-term and issuer ratings of Honda Motor Co., Ltd. and its supported subsidiaries.

The outlook change reflects Moody’s concern that Honda faces significant challenges in regaining its market position due to growing competition. Moreover, a series of negative one-time events in 2011 have delayed the recovery in its profits, which have historically been high and stable.

Battered by the strong yen and supply disruptions from Thailand’s floods, the Japanese automaker said last week that its net earnings in the October-December quarter tumbled 41 percent to 47.6 billion yen ($625 million) and projected a sharply lower full-year profit.

Honda stopped making cars at its assembly plant in Ayutthaya, north of Bangkok, in October after it was damaged in the worst floods to hit Thailand in 50 years.

The carmaker now estimates a 60% decline in net profit for its fiscal year ending March after factoring in the negative effect of the flooding in Thailand.

Japan’s No.3 automaker was the slowest to recover from the supply chain disruptions after the Japanese earthquake and tsunami and it was the only carmaker whose factory was inundated by historic floods in Thailand, Southeast Asia’s export hub.

Moody’s expects this business to continue to perform well in the next few years and support Honda’s earnings. However, it will not be sufficient to bring the company’s profitability back to a level that fully supports the current rating or offsets the effect of volatile profitability in its automobiles business.