Nov. 26 (Bloomberg) -- Toyota Motor Corp.'s debt rating was cut by Fitch Ratings, the automaker's first downgrade in 10 years, as the slump in U.S. car sales drags down earnings at the company with the industry's best credit.

Fitch cut Toyota's senior unsecured debt rating two levels to AA from AAA with a negative outlook on the company, it said in a report today. The shares dropped 4.6 percent, the most in two weeks, to close at 2,985 yen on the Tokyo Stock Exchange.

A lower debt rating raises borrowing costs for Toyota, potentially hindering its ability to offer interest-free loans to boost sales in the U.S. Toyota, set to topple General Motors Corp.'s 77-year reign as the world's largest automaker this year, may also have its worst share performance since at least 1975.

``Toyota is suffering severely from the ongoing turmoil in the global automotive sector,'' said Tatsuya Mizuno, director at Fitch Ratings, in the report. ``The negative developments in the industry are so substantial and fundamental that even the strongest player -- Toyota -- can no longer support a `AAA' rating.''

The rating cut is 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.

``We are closely monitoring Toyota and especially the U.S. market,'' Moody's analyst Junichi Yamaki said. He declined to say whether the rating may be revised. S & P analyst Osamu Kobayashi couldn't be reached at his office.

Credit Default Swaps

Toyota has 289 billion yen in debt coming due this year, and owes 2.52 trillion yen next year, according to Bloomberg data.

Credit-default swaps on Toyota were quoted 15 basis points higher at 215, 20 times the price of 10.5 a year ago, according to data from Deutsche Bank AG and CMA Datavision.

Toyota had 1.85 trillion yen ($19.5 billion) in cash and near cash as of Sept. 30 and earned 169.5 billion yen ($1.79 billion) in operating profit in the three months ended Sept. 30. That compares with a $4.2 billion operating loss for GM, which said it may run out of cash by the end of the year.

``Toyota's financial foundation is solid, and I don't think there has been such a drastic change to warrant a two-level downgrade,'' said Yasuhiro Matsumoto, senior credit analyst at Shinsei Securities Co. in Tokyo. ``I don't see an impact on the company's new bond issues.''

Share Performance

Toyota's stock has dropped 51 percent this year, set for the worst annual performance since at least 1975. The company is still valued at 18 times GM and Ford Motor Co. combined. Toyota spokesman Hideaki Homma declined to comment on the rating change.

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

``Nobody is immune both from the credit crisis and the crisis in the industry,'' said Rebecca Lindland, an analyst with IHS Global Insight Inc. in Lexington, Massachusetts. ``The industry is in a lot of trouble.''

The rating cut leaves only five companies left with an AAA rating from Fitch: Exxon Mobil Corp. and Johnson & Johnson in the U.S. and Regie Autonome des Transports Parisiens, Reseau Ferre de France and Societe Nationale des Chemins de Fer Francais in France.

Declining demand has prompted Japan's largest carmaker to slash its domestic temporary workforce by 50 percent to 3,000 by the end of March.

Government Aid

The weak market has spurred U.S. automakers to seek government aid, and General Motors has said it may run short of operating cash by year's end.

``The turmoil in the U.S. and other markets may be protracted, potentially lasting for the next two to three years,'' Mizuno said.

Toyota slashed its profit forecast 56 percent earlier this month as the yen gained against the dollar and euro and the credit crunch pushed industrywide October U.S. sales to the lowest level since 1983.

The yen has gained 18 percent rise against the dollar and 32 percent against the euro this year.

Yen's Effect

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.

Congress has set a Dec. 2 deadline for GM, Ford Motor Co. and Chrysler LLC to present plans that prove they will be able to survive and pay back any federal loans. Congress may vote on an aid package on Dec. 8.

GM said Nov. 7 that 2009 U.S. industrywide sales will be 11.7 million, down from a forecast of 14 million. Hyundai Motor Co., South Korea's largest carmaker, said yesterday that the U.S. market could fall to 10 million vehicles next year, the lowest since 1981.

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

Last Updated: November 26, 2008 03:58 EST