27. Apr 2017 Rating news – Cross-sector
Scope rates Daimler AG at A and S-1, its financing subsidiaries at A; Outlook Stable
The first-time ratings for Daimler AG, its financing subsidiaries, and senior unsecured debt are driven by Scope’s view on the credit-supportive market positions held by the group’s key divisions of cars and trucks, and strong financial risk profile.
Scope Ratings today assigns long-term ratings of A with Stable Outlook to Daimler AG (Daimler), its financing subsidiaries, and to the senior unsecured debt issued by either Daimler AG, or its financing subsidiaries under the group's Euro Medium Term Note Programme. These debt issuances are unconditionally and irrevocably guaranteed by Daimler. A short-term issuer rating of S-1 was also assigned to Daimler AG. The ratings reflect Scope’s view of i) strong market positions held by the group’s key divisions, Mercedes-Benz Cars and Daimler Trucks, ii) Daimler’s strong geographical presence, iii) a very strong financial risk profile, and iv) strong financial flexibility.
Scope’s business risk profile assessment, at the upper end of the ‘BBB’ category, is supported by Daimler’s track record and Scope’s expectation for a continuation of the strong market positions held by the group’s key divisions, Mercedes-Benz Cars and Daimler Trucks; a strong geographical diversification with a presence in both mature and developing markets; and the added diversification benefit from operating a financial services business. The business risk profile is constrained by the pronounced risk for negative cyclical volume changes, notably in the truck division, high capital requirements and investments in R&D to expand the product portfolio, and the technological changes currently affecting the automotive industry.
Scope believes that automakers currently benefit from a favourable macro environment, which is showcased by low gasoline prices supporting volume sales of very profitable SUVs, low interest rates including availability of credit, a weakened euro, high demand for automobiles in China, positive consumer sentiment, and rebounding southern European markets. Daimler has likewise benefited from these developments over the past few years, in addition to positive effects resulting from new and successful car models. Consequently, Daimler’s financial risk profile is very strong and the key support for the A rating.
Daimler has limited financial indebtedness in its industrial business and considerable unrestricted liquidity. The group’s unrestricted and available liquidity (including marketable securities) exceeds financial debt in the industrial business as well as Scope’s debt-adjustments. Therefore, the Scope-adjusted debt figure is negative. The net cash position ultimately results in strong credit ratios, and the key credit ratios that Scope considers important for the assessment of automakers, i.e. Scope-adjusted debt/EBITDA and funds from operations/Scope-adjusted debt are both negative.
Scope’s positive view on the financial risk profile is supplemented by the supportive liquidity position of the group. Going forward, Scope expects the free operating cash flow in the industrial business to cover forecasted dividend payments. Therefore, Scope-adjusted debt should remain negative, i.e. available unrestricted liquidity should continue to exceed financial debt and debt-like adjustments.
In summary, the following ratings were assigned:
- Daimler AG: long-term rating and senior unsecured debt rating of A, Stable Outlook; short-term rating of S-1
- Daimler International Finance B.V.: long-term rating and senior unsecured debt rating of A, Stable Outlook
- Daimler Canada Finance Inc.: long-term rating and senior unsecured debt rating of A, Stable Outlook
- Daimler Finance North America LLC: long-term rating and senior unsecured debt rating of A, Stable Outlook
- Mercedes-Benz Australia/Pacific Pty. Ltd.: long-term rating and senior unsecured debt rating of A, Stable Outlook
- Mercedes-Benz Japan Co., Ltd.: long-term rating and senior unsecured debt rating of A, Stable Outlook
Key rating drivers
The ratings are driven positively by the following:
- Leading position of Mercedes-Benz Cars with one of the strongest brands for premium cars worldwide
- Broad geographic reach across both mature and emerging-market regions, notably in its key divisions, Mercedes-Benz Cars and Daimler Trucks
- Track record of successful product launches, facelifts, and extension of the product range at Mercedes-Benz Cars
- Diversification benefits from captive finance operations, adding a source of operating profits outside manufacturing
- Strong financial risk profile providing a buffer for unexpected negative operating performance and substantial financial flexibility
The following points limit the rating:
- Strong risks of negative cyclical volume changes that may result from worsening consumer sentiment or less favourable economic environment
- Substantial investments required to develop hybrid and electric vehicles and to meet increasingly stringent emission standards
- Technological changes in the automotive industry that may change the competitive landscape
- Strong earnings risks in the commercial vehicle sector given the early-cycle nature of this industry
The Outlook is Stable and incorporates Scope’s expectation that Daimler should keep a strong financial risk profile. The rating case suggests that free operating cash flow generated in the industrial business is sufficient to cover projected dividend payments. Therefore, Scope-adjusted debt will very likely remain negative with no meaningful incremental financial debt in the industrial business, if any.
Scope would consider a negative rating action if free operating cash flow in the group’s industrial business turned negative, triggered by an unexpected decrease in operating profits (EBITDA) owing to a substantially lower unit-sales volume in the key car and truck divisions. In line with its perception of Daimler’s financial policy, Scope does not expect material changes to shareholder remuneration or any sizeable acquisitions. The ratings could be negatively impacted if Daimler’s financial policy became more aggressive, for example, engaging in a large acquisition funded by cash and debt. However, Scope does not view this as a likely scenario.
Scope would consider a positive rating action if Daimler continued its track record of a cautious financial policy including moderate dividend payouts, substantial liquidity, and strong credit metrics, coupled with an improvement of the adjusted EBITDA margin to levels above 12%.
The full rating report, which includes the rating rationale and analytical details, is available HERE.
Regulatory and legal disclosures
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.
The rating analysis has been prepared by Werner Stäblein, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair
The rating concerns entities and financial instruments which were evaluated for the first time by Scope Ratings AG.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.
Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity. The issuer participated in the rating process.
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.
Key sources of information for the rating
• Website of the rated entity
• Annual financial statements
• Annual reports/semi-annual reports of the rated entity
• Information provided on request
• Data provided by external data providers
• External market reports
• Press reports / other public information
• Interview with the rated entity
Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.
Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.
The methodologies applicable for this rating (Corporate Rating Methodology, Rating Methodology – European Automotive and Commercial Vehicle Manufacturers) are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
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