28 July 2023

Toyota Credit Canada Inc.

(“TCCI”)

Annual Financial Report for the financial year ended 31 March 2023

In fiscal year 2022, TCCI Limited Partnership and TCCI Securitization GP Corp. were

created for the purpose of facilitating the securitization of finance receivables. TCCI

Securitization GP Corp. is wholly owned by TCCI, whereas TCCI Limited Partnership is

owned 99.99% by TCCI and 0.01% by TCCI Securitization GP Corp.

TCCI presents its annual financial report for the financial year ended 31 March 2023.

References herein to “TCCI” or the “Company” or “we”, “our” or “us” denote Toyota

Credit Canada Inc. and, where the context requires, its consolidated subsidiaries.

References herein to “Toyota” means TMC and its consolidated subsidiaries.

dealer inventory), wholesale lease financing (i.e. financing of dealer lease portfolios) and

dealership financing (i.e. financing of the construction, acquisition or renovation of

dealership facilities). Such financing programmes are offered in all provinces and

territories of Canada.

In addition to TCCI’s principal business of providing finance products to authorised Toyota

and Lexus dealers and their customers in Canada, TCCI also provides finance products to

authorised Subaru dealers and their customers pursuant to an arrangement TCCI has

entered into with Subaru Canada, Inc (“Subaru”).

but not limited to, new and used vehicle markets, new vehicle incentives, consumer

behaviour, employment growth, our ability to respond to changes in interest rates with

respect to both contract pricing and funding, and the level of competitive pressure. Changes

in these factors can influence the demand for new and used vehicles, the number of

contracts that default and the loss per occurrence, the realisability of residual values on our

lease earning assets, and our gross margins on financing volume. Additionally, our funding

programmes and related costs are influenced by changes in the capital markets and

prevailing interest rates, which may affect our ability to obtain cost-effective funding to

Our primary competitors are other financial institutions including national commercial

banks, credit unions, savings and loan associations, finance companies and, to a lesser

extent, other automobile manufacturers’ affiliated finance companies.

expenses in fiscal 2023 were broadly consistent with fiscal 2022 levels. The recovery for

finance receivables was C$9.5 million, compared to a recovery of C$30.0 million in fiscal

2022. The main factor behind the provision reversal in fiscal 2023 was a decrease in the

allowance for retail finance lease residual reserve of C$11.9 million, which reflected a

stronger than expected used vehicle market in Canada. The recovery for finance

receivables also includes a reduction in the allowance for credit losses of C$1.4 million

due to lower outstanding asset levels. The write-off performance of TCCI’s finance

receivables also improved in fiscal 2023 compared to the prior fiscal year, with write-offs

incurred of C$3.9 million compared to C$4.7 million in fiscal 2022, reflecting improving

economic conditions and the strength of the used vehicle market which mitigated losses on

We manage our exposure to market risks such as interest rate and foreign exchange risks

with derivative instruments. These instruments include interest rate swaps and currency

swaps. Our use of derivatives is limited to the management of interest rate and foreign

exchange risks.

Management determines the application of derivative accounting through the identification

of hedging instruments, hedged items, and the nature of the risk being hedged, as well as

the methodology used to assess the hedging instrument’s effectiveness. The fair values of

derivative assets and liabilities traded in the over-the-counter market are determined using

quantitative models that require the use of multiple market inputs including interest rates,

which are used to value the position. The predominance of market inputs are actively

quoted and can be validated through external sources, including brokers, market

transactions and third-party pricing services. Estimation risk is greater for derivative asset

Liquidity risk is the risk arising from the inability to meet obligations when they come due.

Our liquidity strategy is to maintain the capacity to fund assets and repay liabilities in a

timely and cost-effective manner even in the event of adverse market conditions. This

capacity primarily arises from our ability to raise funds in the domestic and international

capital markets as well as our ability to generate liquidity from our balance sheet. This

strategy has led us to develop a borrowing base that is diversified by market and geographic

distribution, type of security, and investor type, among other factors. Credit support

provided by our parent TFS provides an additional source of liquidity to us, although it is

The following table summarises the outstanding components of our funding sources

(C$ in millions):

1,688

2,615

921

-

We do not rely on any single source of funding and may choose to realign our funding

activities depending upon market conditions, relative costs, and other factors. We believe

that our funding sources, combined with operating and investing activities, provide

sufficient liquidity to meet future funding requirements and business growth. Our funding

volume is based on asset growth and debt maturities.

(a)

Commercial Paper

Short-term funding needs are met through the issuance of commercial paper in Canada and

The following table summarises our components of unsecured term debt (C$ in millions):

debt

purposes and were not drawn upon as of 31 March 2023. The 364 Day Credit Agreement

dated as of 5 November 2021, which was extended on 4 November 2022 to 21 November

2022, the Three Year Credit Agreement and the Five Year Credit Agreement, each dated

as of 5 November 2021, were terminated on 18 November 2022.

In addition, TCCI has uncommitted letters of credit facilities totalling C$61 million at 31

March 2023 and as at 31 March 2022. Of the total credit facilities, C$nil of the

uncommitted letters of credit facilities was used at 31 March 2023 and 2022.

Support Agreement is not a guarantee by TMC of any securities or obligations of TFS.

TMC’s obligations under the TMC Credit Support Agreement rank pari passu with its

and construed in accordance with, the laws of Japan.

obligations arising out of its own bonds, debentures, notes and other investment securities

and commercial paper (collectively, “TCCI Securities”). The TFS Credit Support

Agreement is not a guarantee by TFS of any TCCI Securities or other obligations of TCCI.

TFS’s obligations under the TFS Credit Support Agreement rank pari passu with its senior

unsecured debt obligations. The TFS Credit Support Agreement is governed by, and

construed in accordance with, the laws of Japan.

Support Agreement, as the case may be. The holder of TCCI Securities who made the

claim may then enforce the indemnity directly against TFS and/or TMC.

The TMC Credit Support Agreement and the TFS Credit Support Agreement each provide

for termination by either party upon 30 days written notice to the other party. Such

termination will not take effect until or unless all TFS Securities or all TCCI Securities,

respectively, have been repaid or each relevant rating agency has confirmed to TFS or

TCCI, respectively, that the debt ratings of all such TFS Securities or all such TCCI

Securities, respectively, will be unaffected by such termination.

In connection with the TFS Credit Support Agreement, TCCI and TFS are parties to a credit

support fee agreement (“Credit Support Fee Agreement”). The Credit Support Fee

weighted average outstanding amount of TCCI Securities entitled to credit support.

Credit Ratings

subject to revision or withdrawal at any time by the assigning nationally recognised

statistical rating organisation (“NRSRO”). Each NRSRO may have different criteria for

TCCI’s credit ratings depend in part on the existence of the credit support agreements of

TFS and TMC.

At 31 March 2023, TCCI had 128 full-time employees. There has been no significant

Each of TCCI, TFS and Toyota may be exposed to certain risks and uncertainties that could

have a material adverse impact directly or indirectly on its business, results of operations

and financial condition. There may be additional risks and uncertainties not presently

known to each of TCCI, TFS and Toyota or that it currently considers immaterial that may

also have a material adverse impact on its business, results of operations and financial

condition.

INDUSTRY AND BUSINESS RISKS

TCCI’s results of operations and financial condition are affected by a variety of factors,

including changes in the overall market for retail contracts, wholesale motor vehicle

financing, leasing or dealer financing, the new and used vehicle market, changes in the

level of sales of Toyota, Lexus, private label vehicles or other vehicles in Canada, the rate

of growth in the number and average balance of customer accounts, the Canadian finance

industry’s regulatory environment, competition from other financiers, rate of default by its

customers, changes in the funding markets, its credit ratings, the success of efforts to

not limited to, labour costs, technology costs and premises costs), general economic

conditions, inflation, consequences from changes in tax laws, fiscal and monetary policies

in Canada, the United States, as well as Europe and other countries in which TCCI issues

Adverse economic conditions in Canada may lead to diminished consumer and business

confidence, inflation, lower household incomes, increases in unemployment rates, higher

which increases the risk of default of certain dealers within TCCI’s dealer portfolio.

capital and adversely affect its ability to access the international capital markets and fund

its business in a similar manner, and at a similar cost, to the funding raised in the past.

financial condition of TCCI by increasing TCCI’s cost of funding. If, as a result, TCCI

increases the rates TCCI charges its customers and dealers, TCCI’s competitive position

could be negatively affected. Challenging market conditions may result in less liquidity,

greater volatility, widening of credit spreads and lack of price transparency in credit

markets. Changes in investment markets, including changes in interest rates, exchange

rates and returns from equity, property and other investments, will affect (directly or

Any of these developments could have an adverse effect on TCCI’s results of operations

of war or expansion of hostilities (including the current conflict in Ukraine), health

epidemics and other outbreaks, climate-related risks, and acts of terrorism, could lead to,

among other things, declines in market liquidity and activity levels, volatile market

conditions, a contraction of available credit, inflation, fluctuations in interest rates, weaker

economic growth, and reduced business confidence on an international level, each of

which could have a material adverse effect on TCCI’s results of operations and financial

condition.

increasing its cost of capital and the rates TCCI charges its customers and dealers, which

TCCI uses quantitative models, estimates and assumptions to price products and services,

measure risk, estimate asset and liability values, assess liquidity, manage its balance sheet

and otherwise conduct its business and operations. If the design, implementation, or use

of any of these models is flawed or if actual results differ from TCCI’s estimates or

assumptions, it may adversely affect TCCI’s results of operations and financial condition.

In addition, to the extent that any inaccurate model outputs are used in reports to regulatory

agencies or the public, TCCI could be subjected to supervisory actions, litigation, and other

condition.

(for example, macro-economic conditions). In addition, such assumptions and estimates

often involve complex interactions between a number of dependent and independent

variables, factors, and other assumptions. As a result, TCCI’s actual experience may differ

materially from these estimates and assumptions. A material difference between the

estimates and assumptions and the actual experience may adversely affect TCCI’s results

of operations and financial condition.

Residual value represents an estimate of the end of term market value of a leased asset.

profitability, through residual value provisions, gains or losses on disposal of returned

assets.

Factors which can impact the market value of vehicle assets include local, regional and

national economic conditions, inflation, new vehicle pricing, new vehicle incentive

Toyota and Lexus vehicles, future plans for new Toyota, Lexus and private label product

introductions, competitive actions and behaviour, product attributes of popular vehicles,

the mix of used vehicle supply, the level of current used vehicle values, inventory levels

and fuel prices heavily influence used vehicle values and thus the actual residual value of

off-lease vehicles. Differences between the actual residual values realised on leased

vehicles and TCCI’s estimates of such values at lease origination could have a negative

return of a higher number of leased vehicles could also adversely affect TCCI’s results of

operations and financial condition.

Credit risk is the risk of loss arising from the failure of a customer, dealer or other party to

meet the terms of any retail, lease or dealer financing contract or other contract with TCCI

or otherwise fail to perform as agreed. An increase in credit risk would increase TCCI’s

provision for credit losses, which would have a negative impact on its results of operations

and financial condition. There can be no assurance that TCCI’s monitoring of credit risk

and its efforts to mitigate credit risk are, or will be, sufficient to prevent an adverse effect

The level of credit risk on TCCI’s consumer portfolio is influenced primarily by two

factors: the total number of contracts that default and the amount of loss per occurrence,

which in turn are influenced by various economic factors, the used vehicle market,

purchase quality mix, contract term length and operational changes. The used vehicle

market is impacted by the supply of, and demand for, used vehicles, interest rates, inflation,

new vehicle incentive programmes, the manufacturer’s actual or perceived reputation for

quality, safety and reliability and the general economic outlook.

strength of dealers within that portfolio, dealer concentration, collateral quality and other

economic factors. The financial strength of dealers within TCCI’s dealer portfolio is

influenced by general macroeconomic conditions, the overall demand for new and used

vehicles and the financial condition of motor vehicle manufacturers, among other factors.

disasters, health epidemics, such as the COVID-19 pandemic, and other factors increase

the risk that a customer or dealer may not meet the terms of a retail, lease or dealer

financing or other contract with TCCI or may otherwise fail to perform as agreed. A weak

economic environment evidenced by, among other things, unemployment,

underemployment and consumer bankruptcy filings, may affect some of TCCI’s

customers’ or dealers’ ability to make their scheduled payments.

Changes in interest rates or foreign currency exchange rates (due to inflationary pressure

or other factors) could affect TCCI’s interest expense and the value of its derivative

financial instruments, which could result in volatility in its results of operations, financial

condition and cash flows.

TCCI is exposed to LIBOR-based financial instruments, including through certain of

TCCI’s financing activities. The transition away from the use of LIBOR to alternative rates

and other potential interest rate benchmark reforms is continuing. These reforms have

disappear entirely, or have other consequences which cannot be predicted.

The publication of non-U.S. dollar LIBOR rates on a representative basis, as well as the

publication of the lesser used 1-week and 2-month U.S. dollar LIBOR tenors, ceased as of

the end of December 2021. The most commonly used U.S. dollar LIBOR tenors were

expected to be published until 30 June 2023.

In June 2017, the New York Federal Reserve’s Alternative Reference Rates Committee

recommended the Secured Overnight Financing Rate (“SOFR”) as an alternative to U.S.

that implemented the Adjustable Interest Rate (LIBOR) Act passed by Congress in March

2022 (“LIBOR Act”). The LIBOR Act identified benchmark replacement rates based on

SOFR for covered derivative transactions and cash transactions where a practicable interest

rate fallback method has not been established by 30 June 2023.

result, there can be no assurance that SOFR or any ARR will perform in the same way as

LIBOR would have at any time, including, without limitation, as a result of changes in

interest and yield rates in the market, market volatility or global or regional economic,

financial, political, regulatory, judicial or other events. With limited operating history, it

remains unknown whether SOFR will continue to evolve and what the effects of its

implementation may be on the markets for financial instruments. Although the LIBOR Act

and its implementing regulations include safe harbours if the Federal Reserve Board’s

SOFR-based replacement rates are used, these safe harbours are untested, and TCCI could

still be exposed to risks associated with disputes and litigation with counterparties and

other market participants in connection with implementing replacement rates for LIBOR.

bond, loan and derivative markets, so that SONIA was established as the primary sterling

interest rate benchmark by the end of 2021.

SONIA is based on actual transactions and reflects the average of the interest rates that

banks pay to borrow sterling overnight from other financial institutions and other

institutional investors and in relation to Euro medium term notes is determined by reference

to a compounded daily rate or a compounded index rate. In each case such rate will differ

from sterling LIBOR in a number of material respects, including (without limitation) that

compounded daily rate is a risk-free overnight non-term rate, whereas sterling LIBOR is

change and development, both in terms of the substance of the calculation and in the

development and adoption of market infrastructure for financial instruments referencing

SONIA.

third parties to upgrade their systems, software, and other critical functions to assist in its

following a final publication on 28 June 2024 (the “CDOR Cessation Date”). Investors

should be aware that, when CDOR is discontinued or otherwise unavailable, the rate of