INDEX
Part I		3
Item 1	Financial Statements	3
	Consolidated Statement of Income	3
	Consolidated Balance Sheet	4
	Consolidated Statement of Shareholder’s Equity	5
	Consolidated Statement of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis	47
Item 3	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4	Controls and Procedures	72
Part II		73
Item 1	Legal Proceedings	73
Item 1A	Risk Factors	73
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 3	Defaults Upon Senior Securities	74
Item 4	Submission of Matters to a Vote of Security Holders	74
Item 5	Other Information	74
Item 6	Exhibits	74
	Signatures	75
	Exhibit Index	76

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENT OF INCOME

(Dollars in millions)

(Unaudited)

	Three months ended September 30,				Six months ended September 30,
	2009		2008		2009		2008
Financing revenues:
Operating lease	$1,175		$1,236		$2,371		$2,431
Retail financing	790		845		1,571		1,663
Dealer financing	78		145		171		293
Total financing revenues	2,043		2,226		4,113		4,387
Depreciation on operating leases	836		1,076		1,729		2,025
Interest expense	618		642		1,117		685
Net financing revenues	589		508		1,267		1,677
Insurance earned premiums and contract revenues	114		106		224		211
Investment and other income	47		26		105		70
Net financing revenues and other revenues	750		640		1,596		1,958
Expenses:
Provision for credit losses	11		356		339		727
Operating and administrative	174		211		351		419
Insurance losses and loss adjustment expenses	56		48		113		100
Total expenses	241		615		803		1,246
Income before income taxes	509		25		793		712
Provision for income taxes	199		8		307		275
Net income	$310		$17		$486		$437
See Accompanying Notes to Consolidated Financial Statements.

 

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TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED BALANCE SHEET

(Dollars in millions)

(Unaudited)

	September 30, 2009		March 31, 2009
ASSETS
Cash and cash equivalents	$2,929		$6,298
Investments in marketable securities	2,357		2,187
Finance receivables, net	52,664		54,574
Investments in operating leases, net	16,794		17,980
Other assets	2,922		2,640
Total assets	$77,666		$83,679
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt	$66,366		$72,983
Deferred income taxes	2,997		2,454
Other liabilities	3,578		4,149
Total liabilities	72,941		79,586
Commitments and contingencies (See Note 12)
Shareholder's equity:
Capital stock, $10,000 par value (100,000 shares authorized;
91,500 issued and outstanding)	915		915
Additional paid-in-capital	1		1
Accumulated other comprehensive income (loss)	83		(63)
Retained earnings	3,726		3,240
Total shareholder's equity	4,725		4,093
Total liabilities and shareholder's equity	$77,666		$83,679
See Accompanying Notes to Consolidated Financial Statements.

 

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 TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY

(Dollars in millions)

(Unaudited)

	Capital stock		Additional paid-in capital		Accumulated other comprehensive (loss) income		Retained earnings		Total
BALANCE AT MARCH 31, 2008	$915		$-		$-		$3,865		$4,780
Effects of accounting change for retirement benefits	-		-		-		(2)		(2)
Net income for the six months ended September 30, 2008	-		-		-		437		437
Net unrealized loss on available-for-sale marketable securities, net of tax benefit of $42 million	-		-		(71)		-		(71)
Reclassification adjustment for net loss included in net income, net of tax benefit of $4 million	-		-		7		-		7
Total comprehensive (loss) income	-		-		(64)		437		373
BALANCE AT SEPTEMBER 30, 2008	$915		$-		($64)		$4,300		$5,151
BALANCE AT MARCH 31, 2009	$915		$1		($63)		$3,240		$4,093
Net income for the six months ended September 30, 2009	-		-		-		486		486
Net unrealized gain on available-for-sale marketable securities, net of tax provision of $85 million	-		-		139		-		139
Reclassification adjustment for net loss included in net income, net of tax benefit of $4 million	-		-		7		-		7
Total comprehensive income	-		-		146		486		632
BALANCE AT SEPTEMBER 30, 2009	$915		$1		$83		$3,726		$4,725
See Accompanying Notes to Consolidated Financial Statements.

 

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TOYOTA MOTOR CREDIT CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in millions)

(Unaudited)

	Six months ended September 30,
	2009		2008
Cash flows from operating activities:
Net income	$486		$437
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,786		2,094
Recognition of deferred income	(495)		(489)
Provision for credit losses	339		727
Amortization of deferred origination fees	166		167
Fair value adjustments and amortization of premiums and        discounts associated with debt, net	4,050		(2,706)
Net (gain) loss from sale of marketable securities	(1)		10
Impairment on marketable securities	6		8
Net change in:
Derivative assets	(698)		1,303
Other assets	(157)		(445)
Deferred income taxes	454		280
Derivative liabilities	(957)		(384)
Other liabilities	401		33
Net cash provided by operating activities	5,380		1,035
Cash flows from investing activities:
Purchase of investments in marketable securities	(324)		(1,095)
Disposition of investments in marketable securities	387		810
Acquisition of finance receivables	(10,987)		(14,443)
Collection of finance receivables	10,087		10,633
Net change in wholesale receivables	2,617		703
Acquisition of investments in operating leases	(3,020)		(4,938)
Disposals of investments in operating leases	2,578		2,135
Advances to affiliates	(1,663)		(4,002)
Repayments from affiliates	2,262		2,761
Other, net	(9)		-
Net cash provided by (used in) investing activities	1,928		(7,436)
Cash flows from financing activities:
Proceeds from issuance of debt	3,728		11,199
Payments on debt	(9,780)		(9,083)
Net change in commercial paper	(6,607)		4,753
Net advances to TFSA (Note 14)	-		(23)
Advances from affiliates (Note 14)	2,001		-
Repayments to affiliates (Note 14)	(19)		-
Net cash (used in) provided by financing activities	(10,677)		6,846
Net (decrease) increase in cash and cash equivalents	(3,369)		445
Cash and cash equivalents at the beginning of the period	6,298		736
Cash and cash equivalents at the end of the period	$2,929		$1,181
Supplemental disclosures:
Interest paid	$1,140		$1,376
Income taxes received	$4		$9

See Accompanying Notes to Consolidated Financial Statements.

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data

Basis of Presentation

The information furnished in these unaudited interim financial statements for the three and six months ended September 30, 2009 and 2008 has been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In the opinion of management, the unaudited financial information reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods presented.  The results of operations for the three and six months ended September 30, 2009 do not necessarily indicate the results that may be expected for the full year.

These financial statements should be read in conjunction with the Consolidated Financial Statements, significant accounting policies, and other notes to the Consolidated Financial Statements included in Toyota Motor Credit Corporation’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended March 31, 2009 (“fiscal 2009”), which was filed with the Securities and Exchange Commission (“SEC”) on June 16, 2009.  References herein to “TMCC” denote Toyota Motor Credit Corporation, and references herein to “we”, “our”, and “us” denote Toyota Motor Credit Corporation and its consolidated subsidiaries.

In preparing these financial statements, we have evaluated events and transactions for potential recognition or disclosure through November 10, 2009, the date the financial statements were issued.

Summary of Significant Accounting Policies

Investments in Marketable Securities

Investments in marketable securities consist of fixed income and equity securities.  Fixed income and equity securities designated as available-for-sale (“AFS”) are carried at fair value using quoted market prices where available with unrealized gains or losses included in accumulated other comprehensive income, net of applicable taxes.  We use the specific identification method to determine realized gains and losses related to our investment portfolio.  Realized investment gains and losses are reflected in Investment and Other Income in the Consolidated Statement of Income.

Other-Than-Temporary Impairment

We periodically evaluate unrealized losses on our AFS securities portfolio for other-than-temporary impairment.  If we have no intent to sell and we believe that it is more likely than not we will not be required to sell these securities prior to recovery, only the credit loss component of the unrealized losses are recognized in earnings, while the remainder of the loss is recognized in Accumulated Other Comprehensive Income (“AOCI”). The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected using a credit cash flow analysis for debt securities.

We perform periodic reviews of our AFS equity securities to determine whether unrealized losses are temporary in nature.  If losses are considered to be other-than-temporary, the cost basis of the security is written down to fair value and the write down is reflected in Investment and Other Income in the Consolidated Statement of Income.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

New Accounting Guidance

In October 2009, the Financial Accounting Standards Board (“FASB”) issued accounting guidance that sets forth the requirements that must be met for a company to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered.  We are evaluating the impact of adopting this accounting guidance, which is effective for us on April 1, 2011.

In October 2009, the FASB issued accounting guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements that function together to deliver the product’s essential functionality.  The accounting guidance more closely reflects the underlying economics of these transactions.  We are evaluating the impact of adopting this accounting guidance, which is effective for us on April 1, 2011.

In August 2009, the FASB issued accounting guidance which provides clarification that, in the absence of a quoted price for a liability, companies may apply methods that use the quoted price of an investment traded as an asset or other valuation techniques consistent with the fair-value measurement principle.  We do not expect this accounting guidance, which is effective for us beginning October 1, 2009, to have a material impact on our consolidated financial condition or results of operations.

In June 2009, the FASB issued accounting guidance which requires entities to provide greater transparency about transfers of financial assets and a company’s continuing involvement in those transferred financial assets. The accounting guidance also removes the concept of a qualifying special-purpose entity.  We are evaluating the impact of adopting this accounting guidance, which is effective for us beginning April 1, 2010.

In June 2009, the FASB issued accounting guidance which changes the existing consolidation model for variable interest entities to a new model based on a qualitative assessment of power and economics.  We are evaluating the impact of adopting this accounting guidance, which is effective for us beginning April 1, 2010.

Recently Adopted Accounting Guidance

In June 2009, the FASB issued The Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”) as the single source of authoritative accounting guidance for public companies.  The Codification did not change generally accepted accounting principles but rather enhanced the way accounting principles are organized.  The Codification was effective for us July 1, 2009 and its adoption did not have a material impact on our consolidated financial condition or results of operations.

In May 2009, the FASB issued accounting guidance on subsequent events which requires companies to address the accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Interim Financial Data (Continued)

In December 2007, the FASB issued accounting guidance which requires all companies to report noncontrolling interests in subsidiaries as equity in the consolidated financial statements and to account for transactions between an entity and noncontrolling owners as equity transactions if the parent retains its controlling interest in the subsidiary. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

In April 2009, the FASB issued accounting guidance requiring disclosure about the method and significant assumptions used to establish the fair value of financial instruments for interim reporting periods as well as annual statements. The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

In April 2009, the FASB issued additional accounting guidance for other-than-temporary impairments to improve the consistency in the timing of impairment recognition, as well as provide greater clarity to investors about credit and non-credit components of impaired debt securities that are not expected to be sold.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

In April 2009, the FASB issued accounting guidance which primarily addressed the measurement of fair value of financial assets and liabilities when there is no active market or where the price inputs being used could be indicative of distressed sales.  The adoption of this accounting guidance did not have a material impact on our consolidated financial condition or results of operations.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements

Fair Value Measurement – Definition and Hierarchy

The accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  This accounting guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs by requiring that observable inputs be used when available.  Fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1:  Quoted (unadjusted) prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.  Examples of assets currently utilizing Level 1 inputs are most U.S. government securities, actively exchange-traded equity mutual funds, and money market funds.

Level 2:  Quoted prices in active markets for similar assets and liabilities, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.  Examples of assets and liabilities currently utilizing Level 2 inputs are U.S. government agency securities, corporate bonds, most mortgage-backed and asset-backed securities, private placement investments in fixed income mutual funds, and most over-the-counter (“OTC”) derivatives.

Level 3:  Unobservable inputs that are supported by little or no market activity may require significant judgment in order to determine the fair value of the assets and liabilities.  Examples of assets and liabilities currently utilizing Level 3 inputs are structured OTC derivatives and certain mortgage-backed and asset-backed securities.

The use of observable and unobservable inputs is reflected in the fair value hierarchy assessment disclosed in the tables within this section.  The availability of observable inputs can vary based upon the financial instrument and other factors, such as instrument type, market liquidity and other specific characteristics particular to the financial instrument.  To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires additional judgment by management. The degree of management’s judgment can result in financial instruments being classified as or transferred to the Level 3 category.

Controls over Valuation of Financial Assets and Financial Liabilities

We have internal controls to ensure the appropriateness of fair value measurements including validation processes, review of key model inputs, and reconciliation of period-over-period fluctuations based on changes in key market inputs.  All fair value measurements are subject to analysis.  Review and approval by management is required as part of the validation processes.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Fair Value Methods

Fair value is based on quoted market prices, if available.  If listed prices or quotes are not available, fair value is based upon internally developed models that primarily use as inputs market-based or independently sourced market parameters.  We use prices and inputs that are current as of the measurement date, including during periods of market dislocation.  In periods of market dislocation, the availability of prices and inputs may be reduced for certain financial instruments.  This condition could result in a financial instrument being reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation Adjustments

Counterparty Credit Valuation Adjustments – Adjustments are required when the market price (or parameter) is not indicative of the credit quality of the counterparty.

Non-Performance Credit Valuation Adjustments – Adjustments reflect our own non-performance risk when our liabilities are measured at fair value.

Liquidity Valuation Adjustments – Adjustments are necessary when we are unable to observe prices for a financial instrument due to market illiquidity.

Valuation Methods

The following section describes the valuation methodologies used for financial instruments measured at fair value, key inputs and significant assumptions in addition to the general classification of such instruments pursuant to the valuation hierarchy.

Cash Equivalents

Cash equivalents, consisting of money market instruments, represent highly liquid investments with maturities of three months or less at purchase.  Generally, quoted market prices are used to determine the fair value of money market instruments.

Marketable Securities

The marketable securities portfolio consists of fixed income and equity securities.  Where available, we use quoted market prices to measure fair value for these financial instruments.  If quoted prices are not available, prices for similar assets and matrix pricing models are used.  Some securities may have limited transparency or less observability; in these situations, fair value may be estimated using various assumptions such as default rates, loss severity and credit ratings.

Derivatives

As part of our risk management strategy, we enter into derivative transactions to mitigate our interest rate and foreign currency exposures.  These derivative transactions are considered over-the-counter.  All of our derivatives counterparties to which we had credit exposure at September 30, 2009 were assigned investment grade ratings by a nationally recognized statistical rating organization (“NRSRO”).

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

We estimate the fair value of our derivatives using industry standard valuation models that require observable market inputs, including market prices, yield curves, credit curves, interest rates, foreign exchange rates, volatilities and the contractual terms of the derivative instruments.  For derivatives that trade in liquid markets, such as interest rate swaps, model inputs can generally be verified and do not require significant management judgment.

Certain other derivative transactions trade in less liquid markets with limited pricing information.  For such derivatives, key inputs to the valuation process include quotes from counterparties, and other market data used to corroborate and adjust values where appropriate.  Other market data includes values obtained from a market participant that serves as a third party pricing agent.  In addition, pricing is validated internally using valuation models to assess the reasonableness of changes in factors such as market prices, yield curves, credit curves, interest rates, foreign exchange rates and volatilities.

Our derivative fair value measurements consider assumptions about counterparty credit risk and our own non-performance risk.  Generally, we assume that a valuation that uses the London Interbank Offered Rate (“LIBOR”) curve to convert future values to present value is appropriate for derivative assets and liabilities.  We consider counterparty credit risk and our own non-performance risk through credit valuation adjustments.  In situations in which our net position with a derivative counterparty is an asset, the credit valuation adjustment calculation uses the credit default probabilities of our derivative counterparties over a particular time period.  In situations in which our net position with a derivative counterparty is a liability, we use our own credit default probability to calculate the required non-performance credit valuation adjustment.  We use a relative fair value approach to allocate the credit valuation adjustments to our derivatives portfolio.

As of September 30, 2009, we decreased our derivative liabilities in the amount of $6 million to account for our own non-performance risk.  Derivative assets were decreased $18 million to account for counterparty credit risk.

Finance Receivables

Our finance receivables are not carried at fair value on a recurring basis on the balance sheet, nor are they actively traded.  In certain instances, for finance receivables where there is evidence of impairment we may use an observable market price or the fair value of collateral if the loan is collateral dependent.  The fair values of impaired finance receivables based on the collateral value or market prices where available are reported at fair value on a nonrecurring basis.  Additional adjustments may be considered to reflect current market conditions when estimating fair value.

Other Assets

Other assets consist, in part, of a receivable from a money market mutual fund, which was adversely affected by the liquidity crisis in the marketplace during fiscal 2009.  Since the net asset value of the money market mutual fund was no longer publicly available, we used net present value techniques adjusted for credit and liquidity risks and reported this in other assets.  Based on our analysis of the fund’s status at September 30, 2009, no additional impairment adjustment was considered necessary. The balance of $7 million is reported at fair value on a nonrecurring basis.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of September 30, 2009, by level within the fair value hierarchy (dollars in millions):

	Fair value measurements on a recurring basis
	Level 1	Level 2	Level 3	Counterparty netting & collateral 1	Fair value
Cash equivalents	$2,743	$-	$-	$-	$2,743
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	38	20	-	-	58
Municipal debt securities	-	12	-	-	12
Foreign government debt securities	-	19	-	-	19
Corporate debt securities	-	83	-	-	83
Mortgage-backed securities:
Agency mortgage-backed securities	-	117	-	-	117
Non-agency mortgage-backed securities2	-	57	1	-	58
Asset-backed securities	-	311	1	-	312
Equity instruments:
Fixed income mutual funds	-	1,377	-	-	1,377
Equity mutual funds	321	-	-	-	321
Available-for-sale securities total	359	1,996	2	-	2,357
Derivatives:
Derivative assets3	-	4,841	227	(4,201)	867
Embedded derivative assets	-	-	6	-	6
Derivatives total	-	4,841	233	(4,201)	873
Total assets 4	3,102	6,837	235	(4,201)	5,973
Derivative liabilities3	-	(1,620)	(83)	1,353	(350)
Embedded derivative liabilities and options	-	-	(35)	-	(35)
Total liabilities 4	-	(1,620)	(118)	1,353	(385)
Total net assets and liabilities	$3,102	$5,217	$117	($2,848)	$5,588

1	We have met the accounting guidance for setoff criteria and have elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally enforceable master netting agreements exist.

2	Includes $29 million in commercial mortgage-backed securities.

3

Includes derivative asset counterparty credit valuation adjustment of $18 million and derivative liability non-performance credit valuation adjustment of $6 million.  Derivative assets and derivative liabilities include interest rate swaps, foreign currency swaps, foreign currency forwards, and interest rate caps.

4	Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The following table summarizes our financial assets and liabilities that were accounted for at fair value as of March 31, 2009, by level within the fair value hierarchy (dollars in millions):

	Fair value measurements on a recurring basis
	Level 1	Level 2	Level 3	Counterparty  netting, collateral 1	Fair value
Cash equivalents	$6,129	$-	$-	$-	$6,129
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	44	27	-	-	71
Municipal debt securities	-	3	-	-	3
Foreign government debt securities	-	-	-	-	-
Corporate debt securities	-	63	-	-	63
Mortgage-backed securities:
Agency mortgage-backed securities	-	114	-	-	114
Non-agency mortgage-backed securities2	-	69	-	-	69
Asset-backed securities	-	376	-	-	376
Equity instruments:
Preferred stock	1	-	-	-	1
Fixed income mutual funds	-	1,250	-	-	1,250
Equity mutual funds	240	-	-	-	240
Available-for-sale securities total	285	1,902	-	-	2,187
Derivatives:
Derivative assets3	-	2,020	159	(2,028)	151
Embedded derivative assets	-	-	24	-	24
Derivatives total	-	2,020	183	(2,028)	175
Total assets 4	6,414	3,922	183	(2,028)	8,491
Derivative liabilities3	-	(2,909)	(216)	1,808	(1,317)
Embedded derivative liabilities and options	-	-	(25)	-	(25)
Total liabilities 4	-	(2,909)	(241)	1,808	(1,342)
Total net assets and liabilities	$6,414	$1,013	($58)	($220)	$7,149

1	We have met the accounting guidance setoff criteria and have elected to net derivative assets and derivative liabilities and the related cash collateral received and paid when legally enforceable master netting agreements exist.

2	Includes $32 million in commercial mortgage-backed securities.

3

Includes derivative asset counterparty credit valuation adjustment of $18 million and derivative liability non-performance credit valuation adjustment of $69 million.  Derivative assets and derivative liabilities include interest rate swaps, foreign currency swaps, foreign currency forwards, and interest rate caps.

4	Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

The determination in classifying a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement.  The following table summarizes the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (dollars in millions):

Three Months Ended September 30, 2009

	Fair value measurements using significant unobservable inputs (Level 3)
	Fair value, July 1, 2009	Total realized gains/ (losses)2	Purchases, issuances, and settlements, net3	Transfers in to Level 3	Transfers out of Level 3	Total unrealized gains/ (losses)4	Fair value September 30, 2009
Available-for-sale securities:
Debt Instruments:
Non-agency mortgage-backed securities	$1	$-	$1	$-	($1)	$-	$1
Asset-backed securities	1	-	-	-	-	-	1
Available-for-sale securities Total	2	-	1	-	(1)	-	2
Derivatives:
Derivative assets (liabilities), net3	(66)	(33)	60	-	-	183	144
Embedded derivative liabilities, net	(5)	(2)	-	-	-	(22)	(29)
Derivatives total	(71)	(35)	60	-	-	161	115
Total net assets (liabilities)1	($69)	($35)	$61	$-	($1)	$161	$117

1	Level 3 recurring liabilities, as a percentage of total liabilities, were less than (0.2%) at September 30, 2009.

2

Realized gains and losses may occur when available-for-sale securities are sold; realized losses may also occur when available-for-sale securities are considered other-than-temporarily impaired.  Realized gains and losses may occur on derivative contracts when they mature or are called or terminated early, and are recorded in interest expense in the Consolidated Statement of Income.

3	Net interest receipts or payments on derivative contracts are shown in purchases, issuances and settlements, net.

4Represents the amount of unrealized gains or losses for the period included in earnings and/or accumulated other comprehensive income     that is attributable to the change in unrealized gains or losses for assets and liabilities classified as Level 3 at the end of the     period.  Derivative contracts are recorded at fair value with changes in fair value recorded as either an unrealized gain or loss in     interest expense in the Consolidated Statement of Income.  Unrealized gains or losses on available-for-sale securities are recorded in     accumulated other comprehensive income in the Consolidated Statement of Shareholder’s Equity.

 

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Three Months Ended September 30, 2008

	Fair value measurements using significant unobservable inputs (Level 3)5
	Fair value, July 1, 2008	Total realized gains/ (losses)2	Purchases, issuances, and settlements, net3	Transfers in to Level 3	Transfers out of Level 3	Total unrealized gains/ (losses)4	Fair value September 30, 2008
Available-for-sale securities:
Debt Instruments:
Non-agency mortgage-    backed securities	$1	$-	$-	$-	$-	$-	$1
Asset-backed securities	1	(1)	-	-	-	1	1
Available-for-sale securities Total	2	(1)	-	-	-	1	2
Derivatives:
Derivative assets (liabilities),    net 3	160	(52)	35	293	-	(166)	270
Embedded derivative liabilities, net	(23)	-	-	-	-	43	20
Derivatives Total	137	(52)	35	293	-	(123)	290
Other assets6	-	-	-	424	-	-	424
Total net assets (liabilities)1	$139	($53)	$35	$717	$-	($122)	$716

1	Level 3 recurring liabilities, as a percentage of total liabilities, were less than (0.9%) at September 30, 2008.

2

Realized gains and losses may occur when available-for-sale securities are sold; realized losses may also occur when available-for-sale securities are considered other-than-temporarily impaired.  Realized gains and losses may occur on derivative contracts when they mature or are called or terminated early, and are recorded in interest expense in the Consolidated Statement of Income.

   3 Net interest receipts or payments on derivative contracts are shown in purchases, issuances and settlements, net.

4

Represents the amount of unrealized gains or losses for the period included in earnings and/or accumulated other comprehensive income that is attributable to the change in unrealized gains or losses for assets and liabilities classified as Level 3 at the end of the period.  Derivative contracts are recorded at fair value with changes in fair value recorded as either an unrealized gain or loss in interest expense in the Consolidated Statement of Income.  Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income in the Consolidated Statement of Shareholder’s Equity.

   5 Prior period amounts have been reclassified to conform to the current period presentation.

   6 Represents a money market mutual fund balance excluding the credit and liquidity valuation adjustments of $10 million.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2009

	Fair value measurements using significant unobservable inputs (Level 3)5
	Fair value, April 1, 2009	Total realized gains/ (losses)2	Purchases, issuances, and settlements, net3	Transfers in to Level 3	Transfers out of Level 3	Total unrealized gains/ (losses)4	Fair value September 30, 2009
Available-for-sale securities:
Debt Instruments:
Non-agency mortgage-    backed securities	$-	$-	$1	$-	$-	$-	$1
Asset-backed securities	-	-	-	1	-	-	1
Available-for-sale securities Total	-	-	1	1	-	-	2
Derivatives:
Derivative assets (liabilities),    net 3	(57)	(96)	97	-	(10)	210	144
Embedded derivative    liabilities, net	(1)	(2)	-	-	-	(26)	(29)
Derivatives Total	(58)	(98)	97	-	(10)	184	115
Total net assets (liabilities)1	($58)	($98)	$98	$1	($10)	$184	$117

 

1	Level 3 recurring liabilities, as a percentage of total liabilities, were less than (0.2%) at September 30, 2009.

2

Realized gains and losses may occur when available-for-sale securities are sold; realized losses may also occur when available-for-sale securities are considered other-than-temporarily impaired.  Realized gains and losses may occur on derivative contracts when they mature or are called or terminated early, and are recorded in interest expense in the Consolidated Statement of Income.

   3 Net interest receipts or payments on derivative contracts are shown in purchases, issuances and settlements, net.

4

Represents the amount of unrealized gains or losses for the period included in earnings and/or accumulated other comprehensive income that is attributable to the change in unrealized gains or losses for assets and liabilities classified as Level 3 at the end of the period.  Derivative contracts are recorded at fair value with changes in fair value recorded as either an unrealized gain or loss in interest expense in the Consolidated Statement of Income.  Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income in the Consolidated Statement of Shareholder’s Equity.

   5 Prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Six Months Ended September 30, 2008

	Fair value measurements using significant unobservable inputs (Level 3)5
	Fair value, April 1, 2008	Total realized gains/(losses)2	Purchases, issuances, and settlements, net3	Transfer in to Level 3	Transfers out of Level 3	Total unrealized gains/ (losses)4	Fair value September 30, 2008
Available-for-sale securities:
Debt Instruments:
Non-agency mortgage-    backed securities	$-	$-	$-	$1	$-	$-	$1
Asset-backed securities	-	-	-	1	-	-	1
Available-for-sale securities Total	-	-	-	2	-	-	2
Derivatives:
Derivative assets (liabilities),    net 3	295	(90)	22	293	-	(250)	270
Embedded derivative liabilities, net	(40)	-	-	-	-	60	20
Derivatives Total	255	(90)	22	293	-	(190)	290
Other assets6	-	-	-	424	-	-	424
Total net assets (liabilities)1	$255	($90)	$22	$719	$-	($190)	$716

1	Level 3 recurring liabilities, as a percentage of total liabilities, were less than (0.9%) at September 30, 2008.

2

Realized gains and losses may occur when available-for-sale securities are sold; realized losses may also occur when available-for-sale securities are considered other-than-temporarily impaired.  Realized gains and losses may occur on derivative contracts when they mature or are called or terminated early, and are recorded in interest expense in the Consolidated Statement of Income.

   3 Net interest receipts or payments on derivative contracts are shown in purchases, issuances and settlements, net.

4

Represents the amount of unrealized gains or losses for the period included in earnings and/or accumulated other comprehensive income that is attributable to the change in unrealized gains or losses for assets and liabilities classified as Level 3 at the end of the period.  Derivative contracts are recorded at fair value with changes in fair value recorded as either an unrealized gain or loss in interest expense in the Consolidated Statement of Income.  Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income in the Consolidated Statement of Shareholder’s Equity.

   5 Prior period amounts have been reclassified to conform to the current period presentation.

   6 Represents a money market mutual fund balance excluding the credit and liquidity valuation adjustments of $10 million.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Assets Measured at Fair Value on a Nonrecurring Basis

For each major category of assets, we disclose the fair value on a nonrecurring basis and any changes in fair value during the reporting period.  Certain assets are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances, for example, when there is evidence of impairment.  These assets include impaired finance receivables and a receivable from a money market mutual fund.

The following tables present the financial instruments carried on the Consolidated Balance Sheet by caption and by level within the valuation hierarchy for which a nonrecurring change in fair value has been recorded during the reporting period (dollars in millions):

Fair value measurements on a nonrecurring basis as of September 30, 2009:

	Level 1	Level 2	Level 3	Total fair value
Finance receivables, net	$-	$-	$271	$271
Other assets	-	-	7	7
Total assets at fair value on a nonrecurring basis	$-	$-	$278	$278

Fair value measurements on a nonrecurring basis as of March 31, 2009:

	Level 1	Level 2	Level 3	Total fair value
Finance receivables, net	$-	$-	$237	$237
Other assets	-	-	26	26
Total assets at fair value on a nonrecurring basis	$-	$-	$263	$263

Nonrecurring Fair Value Changes

The following table presents the total change in value of financial instruments for which a fair value adjustment has been included in the Consolidated Statement of Income (dollars in millions):

 
 

	Three months ended		Six months ended
	September 30,		September 30,
	2009	2008	2009	2008
Finance receivables, net	($26)	($6)	($17)	($6)

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 2 – Fair Value Measurements (Continued)

Significant Changes to Level 3 Assets during the Period

Level 3 net assets reported at fair value on a recurring basis increased by $186 million and $175 million for the first three and six months ended September 30, 2009, respectively.  The increases are primarily attributable to volatile foreign exchange rates.  The fair value of foreign exchange derivatives have appreciated because the U.S. Dollar continues to weaken relative to other major currencies in our portfolio.

Impaired finance receivables reflect some deterioration as we identified additional impaired loans in our wholesale and dealer credit portfolio.  We recognized $26 million and $17 million of impairment losses for the three and six months ended September 30, 2009 where impairment is based on the fair value of the underlying collateral.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 3 - Fair Value of Financial Instruments

The accounting guidance for the fair value of financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair value.  Financial instruments that are within the scope of this accounting guidance are included in the table below.  The accounting guidance does not require disclosure of the fair value of certain financial instruments such as lease financing arrangements and nonfinancial instruments, including goodwill and intangible assets.

The following is a description of financial instruments for which the ending balances as of September 30, 2009 are not carried at fair value in their entirety on the Consolidated Balance Sheet.

Commercial Paper

These instruments are carried at amounts that approximate fair value due to their short duration and generally negligible credit risk.  Our commercial paper issuances expose us primarily to interest rate risk.  Where available, quoted market prices are used to value commercial paper.

 
 

Finance Receivables

Fair value of finance receivables is generally determined by projecting expected cash flows and discounting those cash flows using a rate reflective of current market conditions.  We estimate cash flows expected to be collected using contractual principal and interest cash flows adjusted for specific factors, such as prepayments, default rates, loss severity, credit scores, and collateral type.  These estimated cash flows are discounted at quoted secondary market rates if available, or estimated market rates that incorporate management’s best estimate of investor assumptions about the portfolio.

Debt

We use quoted market prices for debt when available.  When quoted market prices are not available, fair value is estimated based on current market rates and credit spreads for debt with similar maturities.

The carrying value and estimated fair value of certain financial instruments were as follows (dollars in millions):

	September 30, 2009		March 31, 2009
	Carrying Value	Fair Value	Carrying Value	Fair Value
Financial assets
Finance receivables, net1	$52,315	$54,240	$54,165	$53,838
Financial liabilities
Commercial paper	$11,381	$11,381	$18,027	$18,027
Term debt2	$54,985	$53,300	$54,956	$55,101

1	Finance receivables are presented net of allowance for credit losses. Amounts exclude related party transactions and direct finance leases.

2	Carrying value of term debt represents the sum of notes and loans payable and carrying value adjustment.  Amount includes $4.1 billion and $2.0 billion of loans payable to affiliates at September 30 and March 31, 2009, respectively, that are carried at amounts that approximate fair value.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities

We classify all of our investments in marketable securities as available-for-sale.  The amortized cost and estimated fair value of investments in marketable securities and related unrealized gains and losses were as follows (dollars in millions):

	September 30, 2009
	Amortized cost		Unrealized gains		Unrealized losses		Fair value1
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	$57		$1		$-		$58
Municipal debt securities	11		1		-		12
Foreign government debt securities	19		-		-		19
Corporate debt securities	76		7		-		83
Mortgage-backed securities:
Agency mortgage-backed securities	113		4		-		117
Non-agency mortgage-backed securities2	53		6		(1)		58
Asset-backed securities	304		8		-		312
Equity instruments:
Fixed income mutual funds	1,342		54		(19)		1,377
Equity mutual funds	248		73		-		321
Total investments in marketable securities	$2,223		$154		($20)		$2,357

	March 31, 20093
	Amortized cost		Unrealized gains		Unrealized losses		Fair value1
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	$70		$2		($1)		$71
Municipal debt securities	3		-		-		3
Foreign government debt securities	-		-		-		-
Corporate debt securities	64		1		(2)		63
Mortgage-backed securities:
Agency mortgage-backed securities	110		4		-		114
Non-agency mortgage-backed securities2	78		2		(11)		69
Asset-backed securities	384		-		(8)		376
Equity instruments:
Preferred stock	1		-		-		1
Fixed income mutual funds	1,334		8		(92)		1,250
Equity mutual funds	245		-		(5)		240
Total investments in marketable securities	$2,289		$17		($119)		$2,187

1 Includes $45 million and $54 million of securities with subprime exposure at September 30 and March 31, 2009,

   respectively.

2	Includes commercial mortgage-backed securities with fair values of $29 million and $32 million at September 30 and March 31, 2009, respectively.

3 Prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

Other-Than-Temporarily Impaired Securities

In April 2009, the FASB amended the other-than-temporary impairment (“OTTI”) model for debt securities. The impairment model for equity securities was not affected. Under the revised accounting guidance, an OTTI loss with respect to debt securities must be recognized in earnings if we have the intent to sell the debt security or it is more likely than not that we will be required to sell the debt security before recovery of its amortized cost basis.

OTTI Evaluation

An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis.   Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI in the Consolidated Statement of Shareholder’s Equity.  We conduct periodic reviews of securities in unrealized loss positions for the purpose of evaluating whether the impairment is other-than-temporary.

As part of our ongoing assessment of OTTI, we consider a variety of factors.  Such factors include the length of time and extent to which the market value has been less than cost, adverse conditions specifically related to the industry, geographic area or financial condition of the issuer or underlying collateral of the security, the volatility of the fair value changes, and changes to the fair value after the balance sheet date.

 
 

For equity securities, we also consider our intent and ability to hold the equity security for a period of time sufficient for recovery of fair value.  Where we lack that intent or ability, the equity security’s decline in fair value is deemed to be other-than-temporary and is recorded in earnings.

For debt securities, we also consider the factors identified previously.  However, for debt securities that we do not intend to sell or with respect to which it is more likely than not that we will not be required to sell, we also evaluate expected cash flows to be received to determine whether a credit loss has occurred.  In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in AOCI.  For debt securities that we intend to sell, the OTTI loss is recorded in earnings.

OTTI Recognition and Measurement

In April 2009, we adopted the new accounting guidance for OTTI and did not record a transition adjustment for securities held at March 31, 2009 that were previously considered other-than-temporarily impaired as we intend to sell or believe it is more likely than not that we will be required to sell the securities for which we had previously recognized OTTI.

As of September 30, 2009, AFS debt securities that were identified as other-than-temporarily impaired were written down to their current fair value.  For debt securities that we intend to sell or that we believe it is more likely than not that we will be required to sell prior to recovery, an OTTI loss was recognized in earnings.  There were no AFS equity securities deemed to be other-than-temporarily impaired, and therefore, all unrealized losses on AFS equity securities were recognized in AOCI.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

The following table presents other-than-temporary impairment losses that are included in realized losses (dollars in millions):

	Three months ended September 30, 2009	Six months ended September 30, 2009
Total other-than-temporary impairment losses	$-	$6
Less: Portion of loss recognized in other comprehensive income (pretax)1	-	-
Net impairment losses recognized in income2	$-	$6

1 Represents the non-credit component impact of the other-than-temporary impairment on AFS debt securities.

2 Represents the credit component of the other-than-temporary impairment on AFS debt securities included in Investment and Other Income in

   the Consolidated Statement of Income.

Unrealized Losses on Securities

At September 30, 2009, the fair value and total gross unrealized loss of investments that have been in a continuous unrealized loss position for 12 consecutive months or more were $79 million and $7 million, respectively.  These investments are comprised of corporate debt securities, asset-backed securities, mortgage-backed securities, and private placement fixed income mutual funds. These securities are predominately investment grade.

We evaluated investment securities with fair values less than amortized cost and have determined that the decline in value is temporary and is primarily a result of liquidity conditions in the current market environment and not from concerns regarding the credit of the issuers or underlying collateral.  We believe it is probable that we will recover our investments, given the current levels of collateral and credit enhancements that exist to protect the investments.  Accordingly, we have not recognized any other-than-temporary-impairment for these securities.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

The following table presents the aging of fair value and gross unrealized losses for AFS securities (dollars in millions):

	September 30, 2009
	Less than 12 months			12 months or more			Total
	Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Available-for-sale securities:
Debt instruments:
Non-agency mortgage-backed securities1	$3	$-		$8	($1)		$11	($1)
Equity Instruments:
Fixed income mutual funds	199	(13)		71	(6)		270	(19)
Total investments in marketable securities	$202	($13)		$79	($7)		$281	($20)

	March 31, 20092
	Less than 12 months			12 months or more			Total
	Fair value	Unrealized losses		Fair value	Unrealized losses		Fair value	Unrealized losses
Available-for-sale securities:
Debt instruments:
U.S. government and agency obligations	$11	($1)		$-	$-		$11	($1)
Corporate debt securities	24	(1)		4	(1)		28	(2)
Non-agency mortgage-backed securities1	38	(7)		12	(4)		50	(11)
Asset-backed securities	285	(6)		89	(2)		374	(8)
Equity instruments:
Fixed income mutual funds	1,030	(81)		86	(11)		1,116	(92)
Equity mutual funds	240	(5)		-	-		240	(5)
Total investments in marketable securities	$1,628	($101)		$191	($18)		$1,819	($119)

1	The total balance includes commercial mortgage-backed securities with fair value of $1 million and $22 million at

September 30 and March 31, 2009, respectively.

 2 Prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 4 – Investments in Marketable Securities (Continued)

The following table presents the amortized cost and fair value of marketable securities available-for-sale by contractual maturity dates as of September 30, 2009 (dollars in millions).

Available-for-Sale Securities:	Amortized Cost		Fair value
Within one year	$9		$9
After one year through five years	366		378
After five years through ten years	66		69
After ten years	192		203
Fixed income mutual funds	1,342		1,377
Equity mutual funds	248		321
Total	$2,223		$2,357

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 5 – Finance Receivables, Net

Finance receivables, net consisted of the following (dollars in millions):

		September 30,	March 31,
		2009	2009
Retail receivables1		$45,873	$45,312
Dealer financing		8,478	10,939
		54,351	56,251
Deferred origination costs		693	709
Unearned income		(839)	(821)
Allowance for credit losses
Retail receivables		(1,354)	(1,375)
	Dealer financing	(187)	(190)
Total allowance for credit losses		(1,541)	(1,565)
Finance receivables, net		$52,664	$54,574

1 Includes direct finance lease receivables of $353 million and $388 million at September 30 and March 31, 2009, respectively.

The tables below summarize information about impaired finance receivables (dollars in millions):

	September 30,		March 31,
	2009		2009
Impaired account balances with an allowance	$345		$266
Impaired account balances without an allowance	7		35
Total impaired account balances	352		301
Allowance for credit losses	(81)		(64)
Impaired account balances, net	$271		$237

Impaired finance receivables primarily consist of dealer financing accounts for which an allowance has been recorded based on the fair value of the underlying collateral.  For those impaired finance receivables for which the fair value of the underlying collateral was in excess of the outstanding balance, no allowance was provided.

	Three months ended September 30,		Six months ended September 30,
	2009	2008	2009	2008
Average balance of accounts during the period that were impaired as of September 30	$381	$14	$407	$17
Interest income recognized on impaired account balances during the period	$2	$-	$4	$-

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 6 – Investments in Operating Leases, Net

Investments in operating leases, net consisted of the following at the dates indicated (dollars in millions):

	September 30,	March 31,
	2009	20091
Vehicles	$23,018	$24,332
Equipment and other	851	884
	23,869	25,216
Deferred origination fees	(104)	(92)
Deferred income	(539)	(523)
Accumulated depreciation	(6,136)	(6,322)
Allowance for credit losses	(296)	(299)
Investments in operating leases, net	$16,794	$17,980

1 Prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 7 – Allowance for Credit Losses

The following table provides information related to our allowance for credit losses on finance receivables and investments in operating leases (dollars in millions):

	Three months ended September 30,		Six months ended September 30,
	2009	2008	2009	2008
Allowance for credit losses at beginning of period	$2,004	$910	$1,864	$729
Provision for credit losses	11	356	339	727
Charge-offs, net of recoveries1	(178)	(218)	(366)	(408)
Allowance for credit losses at end of period	$1,837	$1,048	$1,837	$1,048

	September 30, 2009	September 30, 2008
Aggregate balances 60 or more days past due2
Finance receivables3	$386	$538
Operating leases3	116	186
Total	$502	$724

 

1	Net of recoveries of $33 million and $66 million for the three and six months ended September 30, 2009, respectively, and $26 million and  $56 million for the three and six months ended  September 30, 2008, respectively.

2	Substantially all retail, direct finance lease, and operating lease receivables do not involve recourse to the dealer in the event of customer  default.

  3 Includes accounts in bankruptcy and excludes accounts for which vehicles have been repossessed.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense

Derivative Instruments

We use derivatives as part of our risk management strategy to hedge against changes in interest rate and foreign currency risks.  We manage these risks by entering into derivatives transactions with the intent to minimize fluctuations in earnings, cash flows and fair value adjustments of assets and liabilities caused by market volatility.

Our derivative activities are monitored by our Asset-Liability Committee (“ALCO”), which provides a framework for financial controls and governance to manage these market risks.  We use internal financial models to analyze data from internal and external sources in developing various hedging strategies.  We incorporate the resulting hedging strategies into our overall risk management strategies.

Our liabilities consist mainly of fixed and floating rate debt, denominated in a number of different currencies, which we issue in the global capital markets.  We hedge our interest rate and currency risk inherent in these liabilities by entering into interest rate swaps and cross-currency swaps, which effectively convert our obligations into U.S. dollar-denominated, 3-month LIBOR-based payments.

Our assets consist primarily of U.S. dollar-denominated, fixed-rate receivables.  Our approach to asset-liability management involves hedging our risk exposures so that changes in interest rates have a limited effect on our net interest margin and cash flows.  We use swaps and interest rate caps, executed on a portfolio basis, to manage interest rate risk.  The resulting asset liability profile is consistent with the overall risk management strategy as directed by ALCO.

We enter into derivatives for risk management purposes only, and our use of derivatives is limited to the management of interest rate and foreign currency risks.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

Derivative Activity Impact on Financial Statements

The table below shows the location and amount of derivatives at September 30, 2009 as reported in the Consolidated Balance Sheet (dollars in millions):

		Hedge accounting derivatives			Non-hedge accounting derivatives			Total
		Notional	Fair value		Notional	Fair value		Notional	Fair value
Other assets
Interest rate swaps		$546	$55		$11,523	$435		$12,069	$490
Foreign currency swaps		13,830	2,443		14,907	2,135		28,737	4,578
Foreign currency forwards		-	-		-	-		-	-
Embedded derivatives		-	-		93	6		93	6
Total		$14,376	$2,498		$26,523	$2,576		$40,899	$5,074
Counterparty netting									(1,330)
Collateral held1									(2,871)
Carrying value of derivative contracts – Other assets									$873
Other liabilities
Interest rate swaps		$25	$-		$55,766	($1,377)		$55,791	($1,377)
Foreign currency swaps		2,828	(233)		803	(66)		3,631	(299)
Foreign currency forwards		-	-		572	(26)		572	(26)
Interest rate caps		-	-		210	(1)		210	(1)
Embedded derivatives		-	-		455	(35)		455	(35)
Total		$2,853	($233)		$57,806	($1,505)		$60,659	($1,738)
Counterparty Netting									1,330
Collateral posted1									23
Carrying value of derivative contracts – Other liabilities									($385)

1 Collateral held and collateral posted represent respectively, cash received from, and cash posted to, certain derivative

   counterparties under reciprocal collateral arrangements. As of September 30, 2009, we posted collateral of $23 million with

   counterparties who were in a net liability position with us.  We also posted collateral of $4 million and held collateral of

   $2,875 million with counterparties who were in a net asset position with us, resulting in net collateral held of $2,871 million.

   The $4 million of collateral posted was from a counterparty whose position shifted from a net liability to a net asset

   subsequent to the date collateral was posted.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The table below shows the location and amount of derivatives at March 31, 2009 as reported in the Consolidated Balance Sheet (dollars in millions):

		Hedge accounting derivatives			Non-hedge accounting derivatives			Total
		Notional	Fair value		Notional2	Fair value		Notional	Fair value
Other assets
Interest rate swaps		$962	$90		$14,393	$528		$15,355	$618
Foreign currency swaps		8,328	1,116		8,007	411		16,335	1,527
Foreign currency forwards		-	-		1,171	34		1,171	34
Interest rate caps		-	-		160	-		160	-
Embedded derivatives		-	-		293	24		293	24
Total		$9,290	$1,206		$24,024	$997		$33,314	$2,203
Counterparty Netting									(1,932)
Collateral held1									(96)
Carrying value of derivative contracts – Other assets									$175
Other liabilities
Interest rate swaps		$-	$-		$59,447	($1,535)		$59,447	($1,535)
Foreign currency swaps		10,028	(1,289)		3,831	(301)		13,859	(1,590)
Foreign currency forwards		-	-		90	-		90	-
Embedded derivatives		-	-		538	(25)		538	(25)
Total		$10,028	($1,289)		$63,906	($1,861)		$73,934	($3,150)
Counterparty Netting									1,932
Collateral held1									(124)
Carrying value of derivative contracts – Other liabilities									($1,342)

1

Represents cash received under reciprocal collateral arrangements that we entered into with certain derivative counterparties.  As of March 31, 2009, we posted collateral of $295 million and held collateral of $419 million with counterparties who were in a net liability position with us, resulting in net collateral held of $124 million. The $419 million of collateral held was from counterparties whose position shifted from a net asset to a net liability position subsequent to the date collateral was transferred.

2	Prior period amounts have been reclassified to conform to current period presentations.

 
 

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the components of interest expense, including the location and amount of gains or losses on derivative instruments and related hedged items, for the three and six months ended September 30, 2009 and 2008 as reported in our Consolidated Statement of Income (dollars in millions):

	Three months ended September 30,		Six months ended September 30,
	2009	20084	2009	2008 4
Interest expense on debt1	$606	$684	$1,230	$1,395
Interest expense on pay float hedge accounting derivatives1	(202)	(122)	(385)	(259)
Interest expense on pay float non-hedge accounting derivatives1, 3	(182)	(53)	(319)	(108)
Interest expense on debt, net of pay float swaps	222	509	526	1,028
Interest expense on non-hedge pay fixed swaps1	345	212	646	414
(Gain) loss on hedge accounting derivatives:
Interest rate swaps2	(9)	2	15	55
Foreign currency swaps2	(925)	1,970	(2,309)	2,401
(Gain) loss on hedge accounting derivatives	(934)	1,972	(2,294)	2,456
Less hedged item:  fixed rate debt4	913	(1,983)	2,294	(2,449)
Ineffectiveness related to hedge accounting derivatives2	(21)	(11)	-	7
Loss (gain) on foreign currency transactions	819	(223)	1,677	(248)
(Gain) loss on currency swaps and forwards 2,3	(860)	183	(1,656)	201
(Gain) loss on other non-hedge accounting derivatives:
Pay float swaps2	(6)	57	133	294
Pay fixed swaps2	119	(85)	(209)	(1,011)
Total interest expense	$618	$642	$1,117	$685

1   Amounts represent net interest settlements and changes in accruals.

2   Amounts exclude net interest settlements and changes in accruals.

3	Includes interest expense on both non-hedge accounting foreign currency swaps and forwards, and non-hedge interest rate derivatives.

4   Prior period amounts have been reclassified to conform to the current period presentation.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 8 – Derivatives, Hedging Activities and Interest Expense (Continued)

The following table summarizes the relative fair value allocation of derivative credit valuation adjustments within interest expense (dollars in millions).    

	Three months ended September 30,		Six months ended September 30,
	2009	2008	2009	2008
Ineffectiveness related to hedge accounting derivatives	($7)	($10)	$20	$10
Loss (gain) on currency swaps and forwards	1	(3)	15	-
(Gain) loss on non-hedge accounting derivatives:
Pay float swaps	(1)	(1)	1	1
Pay fixed swaps	-	(2)	28	(2)
Total credit valuation adjustment allocated to interest expense	($7)	($16)	$64	$9

Credit Risk Related Contingent Features

Certain of our derivative contracts are governed by International Swaps and Derivatives Association (“ISDA”) Master Agreements.  Substantially all of these ISDA Master Agreements contain reciprocal ratings triggers providing either party with an option to terminate the agreement at market value in the event of a ratings downgrade of the other party below a specified threshold.  In addition, upon specified downgrades in a party’s credit ratings, the threshold at which that party would be required to post collateral to the other party would be lowered.

The aggregate fair value of derivative instruments that contain credit risk related contingent features that are in a net liability position at September 30, 2009 was $356 million. In the normal course of business, we posted collateral of $23 million at September 30, 2009.  At September 30, 2009, if our ratings were to have declined to “A+” as rated by S&P or “A1” as rated by Moody’s, we would have been required to post $73 million of additional collateral to the counterparties with which we were in a net liability position at September 30, 2009.  If our ratings were to have declined to “BBB+” or below as rated by S&P or “Baa1” or below as rated by Moody’s, we would have been required to post collateral totaling $356 million to the counterparties with which we were in a net liability position at September 30, 2009.  This is the same amount we would need in order to settle all instruments that were in a net liability position at September 30, 2009.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 9 – Other Assets and Other Liabilities

Other assets and other liabilities consisted of the following (dollars in millions):

	September 30, 2009		March 31, 2009
Other assets:
Notes receivable from affiliates	$687		$1,231
Used vehicles held for sale	250		358
Deferred charges	239		246
Income taxes receivable	336		186
Derivative assets	873		175
Other assets	537		444
Total other assets	$2,922		$2,640
Other liabilities:
Unearned insurance premiums and contract revenues	$1,377		$1,350
Derivative liabilities	385		1,342
Accounts payable and accrued expenses	1,181		901
Deferred income	252		283
Other liabilities	383		273
Total other liabilities	$3,578		$4,149

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 10 – Debt

Debt and the related weighted average contractual interest rates are summarized below (dollars in millions):

 

			Weighted Average Contractual Interest Rates4
	September 30, 2009	March 31, 2009	September 30, 2009	March 31, 2009
Commercial paper1	$11,381	$18,027	0.28%	1.50%
Notes and loans payable2	52,890	55,053	4.02%	3.96%
Carrying value adjustment3	2,095	(97)
Debt	$66,366	$72,983	3.35%	3.35%

1 Includes unamortized discount.

2 Includes unamortized premium/discount and effects of foreign currency transaction gains and losses on non-hedged or de-designated notes and loans payable which are denominated in foreign currencies.

3 Represents the effects of foreign currency transaction gains and losses and fair value adjustments to debt in hedging relationships, accrued redemption premium, and the unamortized fair value adjustments on the hedged item for terminated fair value hedge accounting relationships.

4 Calculated based on original notional or par value before consideration of premium or discount or accrued redemption premium.

Included in our notes and loans payable are unsecured notes denominated in various foreign currencies.  At September 30 and March 31, 2009, the carrying value of the notes payable were $35.4 billion and $28.5 billion, respectively.  Concurrent with the issuance of these unsecured notes, we entered into currency swaps in the same notional amount to convert non-U.S. currency debt to U.S. dollar denominated payments.

Additionally, the carrying value of our notes at September 30, 2009 includes $12.9 billion of unsecured floating rate notes with contractual interest rates ranging from 0 percent to 12.4 percent and $42.1 billion of unsecured fixed rate notes with contractual interest rates ranging from 0 percent to 15.3 percent.  Upon issuance of fixed rate notes, we generally elect to enter into interest rate swaps to convert fixed rate payments on notes to floating rate payments.  The carrying value adjustment on debt increased by $2,192 million at September 30, 2009 compared to March 31, 2009 primarily as a result of a weaker U.S. Dollar relative to certain other currencies in which some of our debt is denominated.

As of September 30, 2009, our commercial paper had an average remaining maturity of 30 days.  Our notes and loans payable mature on various dates through fiscal 2047.

 

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TOYOTA MOTOR CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 11 – Liquidity Facilities and Letters of Credit

For additional liquidity purposes, we maintain syndicated bank credit facilities with certain banks.

364 Day Credit Agreement

In March 2009, TMCC, its subsidiary Toyota Credit de Puerto Rico Corp. (“TCPR”), and other Toyota affiliates entered into a $5.0 billion 364 day syndicated bank credit facility pursuant to a 364 Day Credit Agreement.  The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross default provisions and limitations on consolidations, mergers and sales of assets.  The 364 Day Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30 and March 31, 2009.

Five Year Credit Agreement

In March 2007, TMCC, TCPR, and other Toyota affiliates entered into an $8.0 billion five year syndicated bank credit facility pursuant to a Five Year Credit Agreement. The ability to make draws is subject to covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross default provisions and limitations on consolidations, mergers and sales of assets.  The Five Year Credit Agreement may be used for general corporate purposes and was not drawn upon as of September 30 and March 31, 2009.

Letters of Credit Facilities Agreement

In addition, TMCC has uncommitted letters of credit facilities totaling $5 million at September 30 and March 31, 2009.  Of the total credit facilities, $1 million of the uncommitted letters of credit facilities was issued and outstanding at September 30 and March 31, 2009.

Other Credit Agreements

In December 2008, TMCC entered into a committed bank credit facility in the amount of up to JPY 100 billion, or approximately $1.1 billion as of September 30, 2009.   In December 2008, TMCC entered into an uncommitted bank credit facility in the amount of JPY 100 billion, or approximately $1.1 billion as of September 30, 2009.  Both of these agreements contain covenants and conditions customary in a transaction of this nature, including negative pledge provisions, cross default provisions and limitations on consolidations, mergers and sales of assets.  Neither of these facilities was drawn upon as of September 30 and March 31, 2009.

We are in compliance with the covenants and conditions of the credit agreements described above.