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March 17 (Bloomberg) -- Mazda Motor Corp., burdened with the second-worst credit rating among Japan’s carmakers and a 62 percent surge in short-term borrowing this fiscal year, plans to apply for government aid as it consumes cash.

“We can’t sell bonds right now,” said Nobuyoshi Tochio, general manager of Mazda’s financial services division. “The market isn’t functioning. Conditions are really bad.”

Mazda, Japan’s second-largest car exporter, used 174 billion yen ($1.8 billion) in cash last quarter as sales of Mazda6 sedans have plunged in the U.S. and Europe. The Hiroshima-based company may turn to the government for low- interest loans as its junk rating prevents it from following Toyota Motor Corp. in tapping capital markets.

“Mazda needs loans from the government badly, as it’s vulnerable,” said Koichi Ogawa, chief portfolio manager, at Daiwa SB Investments Ltd. in Tokyo, which manages $28 billion. “The company is important to the local economy, so it should be able to get them.”

Mazda’s short-term borrowings including leases, loans and bonds due this year surged to 221 billion yen in the nine months ended December, exceeding the company’s untapped 200 billion yen credit line. The carmaker expects a 13 billion yen loss for the year ending this month and analysts forecast the loss will almost triple to 37.5 billion yen next fiscal year.

The company may apply to the Japan Bank for International Cooperation and Development Bank of Japan, both government-owned, for loans to bolster its cash position, Mazda’s Tochio said in an interview on March 13 in Tokyo.

Plunging Sales

Surging unemployment and tight credit has driven overall car demand to an almost 30-year low in the U.S. In the first two months of 2009, the company’s sales plunged 29 percent in the U.S., 16 percent in Europe and 38 percent in Japan.

Exacerbating the drop in sales is the yen’s 17 percent gain against the euro and 7.5 percent rise against the dollar in the past six months. The stronger domestic currency cuts Mazda’s earnings when repatriated. Every 1 yen drop against the dollar and euro cuts Mazda’s annual operating profit by 2.6 billion yen and 1.4 billion yen, respectively.

In response, the carmaker slashed production by at least 221,000 vehicles in the second half of the fiscal year, slowing down the rate it was burning cash.

Adjusting Inventory

“We’re adjusting inventory in the fourth quarter,” Chief Financial Officer Kiyoshi Ozaki wrote in an e-mailed response to questions. “We’re aiming to have our cash flow at least break even this quarter.”

The company does not plan to use its 200 billion yen credit line in the fiscal year ending this month as it has enough cash, Ozaki said.

Mazda shares rose 2.6 percent to 159 yen, at the 3 p.m. close on the Tokyo Stock Exchange. They have risen 6.7 percent so far this year compared with a 3.6 percent gain for Toyota and a 22 percent jump for Honda Motor Co.

Mazda also added to its debt after it bought back 6.9 percent of its own shares from Ford Motor Co. in 2008. Ford relinquished control over the smaller company, forcing it to do more development by itself.


“As an independent, Mazda needs to find a way to allocate money for development,” said Ichiro Takamatsu, chief investment officer at Alphex Investments Co. in Tokyo. “Mazda’s struggle may continue next fiscal year, as the market shows no signs of a recovery.”

Toyota, with an Aa1 rating from Moody’s Investors Service, sold 200 billion yen worth of bonds in February. Honda Motor Co. is rated Aa3 by Moody’s and A+ by Standard & Poor’s. Nissan Motor Co. has a Baa2 rating from Moody’s and BBB rating from S&P.

Mitsubishi Motors Corp. has the worst rating among Japan’s carmakers with a Ba2 rating from Moodys and B+ from S&P. Still, the carmaker is part of the Mitsubishi Group, one of Japan’s biggest conglomerates, which bailed out the carmaker in 2004 and 2005.

“Unlike Mitsubishi, Mazda has no backing,” said Yasuhiro Matsumoto, a senior analyst at Shinsei Securities Co. in Tokyo. “It’s hard for Mazda to raise money from the capital markets, because it needs to give a premium to sell bonds with the current rating.”

The company’s BB rating by S&P may be cut if the company fails to cut debt over the next two years, Matsumoto added.

The extra yield over government bonds of similar maturity that investors demand to own Mazda’s 1.87 percent bond due in October 2014 surged to 151.3 basis points on March 13, up from 102.5 at the end of last year, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

A revival hinges on Mazda’s success with the Mazda3 compact car to be revamped this year. The model accounted for 32 percent of Mazda’s vehicle sales last year. Mazda also plans to cut fixed costs by at least 10 percent next fiscal year.

“Few banks will offer new loans to Mazda under the current economic condition,” Shinsei’s Matsumoto said. “Mazda is going to be on a tightrope even with loans from the government.”

To contact the reporter on this story: Naoko Fujimura in Tokyo at [email protected]; Tetsuya Komatsu in Tokyo at [email protected]


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Mulally's foresight is soo great!! I wish he was running... He would be in a fix now had he not unloaded the controlling stake...
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