Question

why does Toyota Motors company issue debt? When was the last time they issued debt? What was the specific reason (provide evidence) that Toyota needed to raise funds? How much did they issue? As a potential investor, would you invest in their bonds? Why or why not?

With interest rates potentially increase, what do you think will happen to existing bonds? How will Toyota react to increased interest rates?

Answer 1

Toyota Motor Corp. is mulling issuing up to ¥100 billion ($900 million) in bonds with maturities of up to 20 years to invest in developing next-generation car technologies. Toyota plans to spend around ¥1.05 trillion on research and development this business year as competition in developing driverless technologies grows. Toyota is likely to use the money to fund ways to upgrade its automated driving and safety technologies.

Toyota’s cash reserves exceeded ¥7 trillion as of March 31. But since the Bank of Japan’s ultra-loose monetary easing policy has pushed down funding costs, the carmaker has apparently decided to secure long-term funds under very favorable terms. In addition to 20-year bonds, Toyota is also considering issuing bonds with maturities of three, five and 10 years.

In last time they have issued the debt in Aug 2017 for R&D development in Japan. Toyota Motor Credit issued international bonds with a 1.87% coupon for USD 171.7m maturing in 2022.

If we talk about specific reason for raising a fund is to invest for the purpose of research and Development. I believe it is good idea also as they are in Automotive industry and they have to continuous work on technology advancement and it will be really helpful for them in competitive environment.

I would like to investment in their bond and the reason is very clear. To understand the reason let's understand how much Toyota is Financially strong.

Large-cap companies such as Toyota Motor Corporation (NYSE:TM), with a market-capitalization of JPY ¥184.86B, are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns more comforting than explosive growth potential. But another key factor to consider when investing in TM is its financial health.

A high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. For TM, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, make it hard to operate.

A basic way to evaluate TM’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses TM’s debt repayment capacity, which is not a big concern for a large company. In the case of TM, operating cash flow turned out to be 0.19x its debt level over the past twelve months. A ratio of over 0.1x shows that TM is generating adequate cash from its core business, which should increase its potential to pay back near-term debt. With a high level of debt on its balance sheet, TM could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe TM can sustainably increase its operational efficiency going forward.

There may be a possibility of Interest rate high for Toyota Bond price, whenever there is a demand of Toyota bond there will be a possibilities of increase in price and bond yield falls and it's vice versa.

Toyota Motor Corp's weighted average cost of capital is 3.13%. Toyota Motor Corp's ROIC % is 5.91% (calculated using TTM income statement data). Toyota Motor Corp generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases. So in case of increment of interest rate it will attract investors and it will create demand. However It will increase cost of capital for Toyota to deal with such situation Toyota should adjust with Capital structure of the company.