Financing The Factory Bank

Borrowing-to-lend for loan-to-buy customers

Toyota Financial Services has to be one of the most fascinating, fraudulent entities operating in the world right now. Initially fuelled by cheap Japanese interest rates when it was first begun in the early 2000s, this “bank within a factory” is one of the world’s most opaque, byzantine and powerful global financing organisations that you have never heard of.

Today, TFS is the focus of Toyota’s operations, issuing billions in zero percent and cut-rate financing offers a year and guzzling a similarly sizeable chunk of money from the fixed income markets. Take, for instance, the company’s 50 billion euro note issuance last September. This was a collaboration between no less than 7 issuers spanning four continents all organised under the giant TFS banner. Not content with borrowing in just euros and yen, in July this earlier, Toyota issued its first dollar-denominated bonds: $2 billion of 3-, 5-, and 10-year commercial paper.

That quick capital raise was shortly followed up with a further $3 billion issuance of USD-denominated retail notes aimed at American private investors — debt that your mother and father might put their savings into. The retail notes are “a way to expand and diversify TFS’ funding sources and provide a competitive investment alternative to investors,” Mike Groff, TFS’s new President, said in a press release at the time.

That’s not all, though — there are the green bonds for environmentally-conscious lenders (a cool $5.5 billion), the 2021 $750m 3.183% yield debt, another 300 million euros of 3-year debt, and there was even a $300 million 1-year tranche which redeems this month. Oh, not to mention the $500 million of overnight lending the company solicits, too. Plus the standard fare of Japanese long bonds and other debt tranches the company issued this year via its myriad network of franchisors. By all accounts, it all adds up to a sizeable chunk of borrowing, representing more than 3 times the company’s steadily relaxing net income.

The recent borrowing splurge is yet another unconventional policy play from Akio Toyoda, the current chief executive of Toyota since 2009. Toyoda is the third-generation heir to the family empire. It was his own grandfather Sakichi Toyoda, no less, the company’s founder, who once famously quipped, “it is more difficult to spend than to earn money.” That was back when the company used to stockpile cash and amortise loans before the year was up. How times have changed.

In Ireland, TFS launched a new office earlier this year, alongside a handful of other countries which saw the manufacturer’s finance empire expanding. However, investors might be forgiven for wondering where all this borrowing is going. After all, Koji Kobayashi, Toyota’s chief financial officer and an executive vice president, told Toyota’s November earnings conference attendees that he intended to cut manufacturing costs by another full 50% over the coming year.

“It would be good if our annual cost savings could reach 600 billion yen ($5.3 billion),” Koji-san said at the time, expressing concerns at what he forecast as “difficult” conditions for the company going ahead. That was despite having posted a record net profit on industry-wide record profit margins. (Toyota’s margins, at 8.9% trounce Honda’s, at around 6%, and Ford’s, which are as low as 3%.)

A peek at Australia, where Toyota Motor has a rather less well-respected reputation, may offer some insight into where all this debt is headed. The Japanese auto-maker laid off 50,000 factory workers in Altona a few years ago, many of them entire families. Needless to say, the effect on sales was felt across the 400-odd dealership franchises throughout the country, denting the company’s usually PR-self-conscious image badly. (Aussies tend not to forgive and forget too quickly if you fuck them.) The challenge has been — how to get sales back on track?

“At the moment, the (dealer) reputation may not be too great but I think we can turn that around and we think this is the way to do it. So we are pretty positive about this,” TFS president and CEO John Chandler told GoAutoNews Premium about the company’s latest sales-side innovation: an algorithm-based credit-matching engine. The algo, which is essentially nothing more complex or fancy than what a bank uses to credit score you for a loan, is, according to Mr. Chandler, the company’s best potential bet yet in getting sales back on track:

“We are seeing some dealers talking of putting the finance decision earlier in the sales process,” he said. “When they can integrate that into the early discussion, particularly quoting the rates, that will become part of the whole process and we won’t necessarily have to hand the customer over to the finance guy at the end of the sales part. Affordability is a key part of the decision.”

Of course, giving customers wads of cash to buy your products so that they end up paying you more on the back end is all very well, but when you are borrowing chunks of cash to do so that is rather a different proposition, surely? At that point, not only are you exposing the investor in the bond to the credit risk of the corporation and its technology systems, but you are actually exposing them to the credit risk of the borrower.

More importantly still, to what extent does the manufacturer have an incentive to make sure that such loans are profitably issued?

That will be the subject of our next post on this topic.