Toyota Partner’s Bond Yield Climbs on Japan Spat: China Credit

Toyota to Honda China Sales Plunge as Consumers Shun Japan Cars
The Toyota Motor Corp. logo is displayed on a vehicle in Beijing. The results help illustrate the rising financial toll on Japanese automakers, who are facing their third crisis since 2011 after the Japanese government’s decision to purchase a group of islands claimed by both countries triggered violent protests last month. Photographer: Nelson Ching/Bloomberg

Chinese automakers that produce Toyota, Honda and Nissan vehicles face the highest debt costs in at least five months as a territorial dispute between China and Japan hurts their sales in the world’s biggest car market.

The yield on February 2013 bonds sold by Guangzhou Automobile Group Co., which has manufacturing ventures with Toyota Motor Corp. and Honda Motor Co., jumped 62 basis points in the third quarter and reached 4.26 percent on Sept. 25, the highest since May 11. July 2013 notes sold by Dongfeng Motor Corp., a partner of Nissan Motor Co., surged 73 basis points to 4.18 percent on Sept. 29. Globally, automakers pay an average 1.86 percent, a Bank of America Merrill Lynch index shows.

Higher borrowing costs are compounding problems for manufacturers of Japanese marques as they lose market share to U.S., European and South Korean rivals. Toyota and Nissan reported this week their biggest drops in China sales since at least 2008 as anti-Japanese sentiment erupts over disputed islands known as Diaoyu in Chinese and Senkaku in Japanese.

“The Diaoyu dispute could last quite long and it could have a lasting impact on car sales for Japanese brands,” said Chris Lau, a fund manager in Hong Kong at Bosera Asset Management Co., whose Shenzhen-based parent manages about $30 billion. “The auto industry is already under pressure as a weak economy persists and local demand remains soft. In the long run, we believe those bonds issued by Japanese joint-venture companies will underperform their peers.”

Yield Premium

Guangzhou Automobile’s February 2013 bonds yielded 4.21 percent yesterday and the rate on Dongfeng Motor’s July 2013 notes was 4.19 percent, according to latest prices from Chinabond. The yield premium investors demand to hold the Guanzhou Automobile securities instead of similar-maturity sovereign debt was 157 basis points, compared with an average 144 since it was sold in February.

The yield on one-year government debt rose 45 basis points, or 0.45 percentage point, in the third quarter and was little changed this month at 2.79 percent, Chinabond data show.

Five-year credit-default swaps protecting sovereign notes fell three basis points this month to 86 in New York, after a 33 basis point drop in the July-September period, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements. The yuan gained 0.08 percent to 6.2796 per dollar this month, after strengthening 1.1 percent in the last quarter.

Torching Showrooms

A decade-long row over the disputed islands was reignited in April when Tokyo Governor Shintaro Ishihara said he may use public funds to purchase them. Protests in China have escalated, with some demonstrators torching auto showrooms and smashing Japanese-branded vehicles, after Japan’s cabinet said on Sept. 11 again that it would buy the islands from a private owner.

China’s central bank governor and finance minister won’t be attending meetings of the International Monetary Fund and World Bank in Japan this week amid the standoff, which has soured ties between Asia’s two biggest economies. Japan’s top three automakers plan to cut production to half of normal levels in China, the Nikkei newspaper reported on Oct. 8.

Sales Slump

Sales of Japanese cars slumped 41 percent to 160,000 units in September, cutting their combined market share to 12.2 percent from 20.5 percent a year earlier, China Association of Automobile Manufacturers announced yesterday.

Toyota’s September deliveries tumbled 49 percent from a year earlier to 44,100 vehicles, Nissan’s fell 35 percent to 76,066 and Honda’s dropped 41 percent to 33,931, the companies said Oct. 9. Mazda Motor Corp. reported this month that deliveries in the country tumbled 35 percent to the lowest in 19 months, Mitsubishi Motors Corp. said Chinese sales plunged 63 percent and Suzuki Motor Corp. announced a 43 percent slide.

Volkswagen AG’s luxury Audi unit boosted sales in China by 20 percent last month to 35,512 vehicles, according to the German company. Ford Motor Co., based in Dearborn, Michigan, said its China sales climbed 35 percent to 59,570 units. Hyundai Motor Co.’s deliveries increased 15 percent to 84,188 units.

“It’s not just a boycott against Japanese cars but also there’s a big negative impact on Chinese state-owned joint ventures,” said Klaus Paur, the Shanghai-based global head of automotive coverage at researcher Ipsos. “They are all losers as half of the profit for Japanese manufacturers goes to Chinese joint ventures. A political solution should be found. As the dispute drags on, there will be an impact not only on Japanese carmakers but also on the Chinese economy.”

Forecasts Cut

The IMF lowered its estimate for China’s growth this year to 7.8 percent from a July projection of 8 percent, it said this week. The Asian Development Bank and the World Bank also cut their 2012 economic growth forecasts for China to 7.7 percent from 8.2 percent in the past week.

Guangzhou Automobile derives 90 percent of sales from joint ventures with Toyota, Honda and other overseas partners, company data show. Nissan and other foreign brands accounted for about 82 percent of Dongfeng Motor’s car sales in 2011, based on figures from China Association of Automobile Manufacturers.

“The impact from the dispute could prolong because buyers worry about their safety in case they drive Japanese cars,” said Liu Fangzheng, a fixed-income analyst at Penghua Fund Management Co., which oversees $16.5 billion of assets. “Still, Guangzhou and Dongfeng have strong government backgrounds and bond yields will move largely in line with the overall debt market” which will be swayed by the speed of monetary stimulus.

The People’s Bank of China has damped expectations for monetary easing since July as policy makers opted to use money-market operations to contain borrowing costs, rather than interest-rate cuts or an reduction of lenders’ reserve requirements. Benchmark rates were lowered in June and July, while reserve-requirement ratios were last relaxed in May.

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