DBRS Assigns Negative Trend to Volvo

DBRS has today confirmed the ratings of AB Volvo (publ) (Volvo or the Company), with the long- and short-term ratings remaining at A (low) and R-1 (low), respectively. However, the trend on the ratings has been changed to Negative from Stable. The trend change reflects the Company’s weak Q1 2009 results, which were below DBRS’s expectations and have had a significant, adverse impact on the Company’s financial profile.

The Company’s net sales in the first quarter declined 27% year-over-year, with Volvo’s two core industrial segments, Trucks and Construction Equipment, showing sharp decreases. Similarly, each of the Company’s major geographic markets posted a significant drop in sales. The Company incurred an operating loss of SEK 4.5 billion in the first quarter, relative to a profit of SEK 6.5 billion generated over the same period the previous year. More significantly, free cash flow was sharply negative, largely due to high working capital absorption of SEK 9 billion (mainly caused by a pronounced drop in payables), resulting from lower production volumes. Volvo’s balance sheet has accordingly deteriorated, as leverage has increased markedly. As of March 31, 2009, the Company’s total debt-to-capitalization ratio stood at 46%, well above historical levels and significantly in excess of its targeted leverage ceiling. (Note: Volvo’s targeted debt ceiling for its industrial operations is net financial debt at less than 40% of equity). DBRS notes that Volvo’s indebtedness has been exacerbated by adverse currency effects associated with Japanese yen-denominated debt incurred through the acquisition of Nissan Diesel Motor Co. Ltd. However, even after adjusting for this effect, Volvo’s debt-to-capitalization is calculated by DBRS at 42%, which still remains high for the current ratings.

DBRS notes, however, that Volvo’s liquidity position remains sound. Industrial debt maturities over the next several years remain moderate and well spread-out. Furthermore, the Company bolstered its liquidity in the quarter through new financings totalling SEK 30 billion. As of March 31, 2009, liquid assets and available credit lines amounted to approximately SEK 52 billion.

DBRS notes that Volvo’s working capital absorption should moderate and eventually reverse itself, resulting in a source of cash for the Company. However, DBRS also observes that for both the Truck and Construction Equipment segments, prospects in most major markets remain weak over the near term. In the event that Volvo is not able to control its losses and debt levels continue to increase, this would likely result in further negative rating actions.

Notes:
All figures are in SEK unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.

Ratings for Volvo Treasury Canada Inc. are based on the parent and guarantor, AB Volvo (publ).