Nov. 17 (Bloomberg) -- Toyota Motor Corp. may have its AAA rating cut by Fitch Ratings, the first such downgrade in 10 years, as the U.S. auto slump damps earnings at the carmaker with the industry's best credit.

Toyota was placed on ``Rating Watch Negative'' and will be subject to a review over the next several weeks, Fitch said in a statement today. Honda Motor Co.'s outlook was also cut to ``stable'' from ``positive.'' Fitch reiterated its A+ rating for the smaller carmaker.

A lower debt rating would raise borrowing costs for Toyota, potentially hindering its ability to offer interest-free loans to boost sales in the U.S. The automaker slashed its profit forecast 56 percent earlier this month after higher fuel costs and the credit crunch pushed industrywide October U.S. sales to the lowest level since 1983.

``Toyota makes most of its money in America and most of their money within that on sales of larger vehicles, which have fallen very, very seriously,'' said Paul Heaton, who manages $500 million in Japanese equities at Pyrford International Ltd. in London. ``Even though Toyota may be selling small cars, it doesn't make a lot of profit, and that's probably what Fitch is rightly concerned about.''

Moody's, S&P

The rating cut would be the company's first since Moody's Investors Service reduced its long-term debt rating from Aaa to Aa1 in 1998. Moody's raised the company back up to Aaa in 2003. Standard & Poor's has rated the carmaker AAA since 1985. Toyota spokesman Hideaki Homma declined to comment on the possible rating change.

Toyota fell 0.3 percent to 3,130 yen today in Tokyo. The stock has dropped 48 percent this year, set for the worst annual performance since at least 1975.

Toyota's U.S. sales through October fell 12 percent, heading toward the company's steepest annual drop since at least 1980, as the industry total slid 15 percent. The weak market has spurred U.S. automakers to seek federal aid, and General Motors Corp. has said it may run short of operating cash by year's end.

Fitch's review of Toyota will ``consider the extent to which the company's very strong financial flexibility may be affected negatively by the weak global market conditions, especially in the U.S., given its significance in terms of Toyota's earnings and cash-flow generation,'' Tatsuya Mizuno, a director in Fitch's Corporate team, said in the statement.

Earnings Target

Asia's largest carmaker, leading GM in global auto sales this year, earlier this month cut its earnings target for the ending March 31 to 550 billion yen ($5.7 billion) down from an earlier goal of 1.25 trillion yen.

Toyota has 317 billion yen in debt coming due this year, and owes 2.56 trillion yen next year, according to Bloomberg data.

Moody's has no plans to revise its rating on Toyota, said Junichi Yamaki, the analyst who covers the carmaker. Standard & Poor's auto analyst Osamu Kobayashi did not answer his office phone.

The yen's 15 percent rise against the dollar and 32 percent gain against the euro this year have also squeezed profits at Toyota and other Japanese automakers.

Toyota based its forecasts on 103 yen to the dollar and 146 yen to the euro, compared with its previous estimate of 105 yen and 161 yen, respectively. Every 1 yen gain against the dollar and euro trims Toyota's annual operating profit by 40 billion yen and 6 billion yen.

Toyota had an operating loss of 34.6 billion yen in North America in the first half, after adjusting for a one-time gain in the valuation of interest rate swaps.

The company's AAA rating compares with Honda's A+ rating, four levels down, and Nissan Motor Co.'s A- rating, six levels below.

Toyota will cut its domestic sales forecast for 2009 to less than 1.5 million vehicles, the Yomiuri newspaper said today. The company last sold less than 1.5 million cars in Japan in 1981, according to the report. The carmaker put the target under review on Nov. 6.

To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net

Last Updated: November 17, 2008 07:38 EST