Moody's Investors Service cut recall-hit Toyota Motor's credit ratings on Thursday, saying that it expected the automaker's current low profitability to continue and that litigation costs could be significant.
The Japanese automaker's once market-leading reputation for quality has been tarnished by a swathe of recalls, particularly in the United States where it recently agreed to pay a record $16.4 million federal fine.
"The rating action reflects the ongoing low level of profitability evident at Toyota, and which we expect to continue for an extended period," Tadashi Usui, a Moody's vice president and senior analyst, said in a statement.
Toyota had estimated in February that previous recalls would cost it $2 billion for its fiscal year ending in March.
But it has recalled more vehicles since that estimate, and most analysts believe the costs will be significantly higher.
Toyota shares extended losses after the announcement to an intraday low of 3,590 yen for a drop of 1.6 percent on the day, in line with the broader market. Analysts said the shares had largely factored in the bad news at Toyota.
"The downgrade is reflecting the concerns market players felt back in January in a delayed manner. I don't expect this to have a significant impact on Toyota shares," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
Moody's cut the rating to Aa2 from Aa1, saying there was uncertainty over Toyota's pricing power and a risk that its operating profit margin would remain well below that appropriate for its rating level until 2012 and possibly beyond.
"Its product quality and recall challenges — largely centered in the U.S. — have created significant uncertainty over whether it can maintain the pricing power it has historically achieved over its rivals," Usui said.
"In coming years, further impacting profitability, on an extraordinary basis, will be the litigation costs associated with the recall; and while the size of such costs is hard to quantify, they could be material. But, for now, its capital and liquidity reserves should be enough to deal with any problems," Usui said.
But Moody's also said it expects Toyota to remain the leading global auto maker in coming years, adding that its current rating should find support from its very strong balance sheet and large liquid reserves.
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