DBRS Confirms Volvo, Trend Remains Negative

DBRS has today confirmed the Senior Unsecured Debt and Commercial Paper ratings of AB Volvo (publ) (Volvo or the Company) at A (low) and R-1 (low), respectively, as it is firmly entrenched as the world’s second largest truck manufacturer and the third leading global player in construction equipment. The trend remains Negative, reflecting strong headwinds facing the Company with severe market conditions (exacerbated by the global financial crisis) prevailing across most of its businesses. However, while these conditions have adversely impacted Volvo’s financial profile, DBRS also recognizes that the Company’s market performance remains in line with its peers and that Volvo has continued to enjoy a solid liquidity position throughout the financial crisis.

The Company’s recent financial results have been weak, in line with the global economic downturn that triggered a sharp decline in demand since the third quarter of 2008. Full year 2008 results were significantly lower year-over-year, with the Company incurring an operating loss in the first quarter of 2009. This has been exacerbated by a high use of working capital as the sudden drop in demand and associated production curtailments resulted in higher inventories and much reduced accounts payable levels. The working capital absorption led to a spike in Volvo’s debt levels with leverage as of March 31, 2009, exceeding the Company’s targeted leverage ceiling and being high for the current ratings.

DBRS notes, however, that the weak results reflect very poor conditions across all of Volvo’s businesses, but in particular the truck and construction equipment segments that represent the significant majority of the Company’s earnings. The truck industry is currently weak across all major geographic markets. In Asia, volumes are lower with the primary Japanese market being in consistent decline for the past several years. In North America, the industry has also been contracting since 2007; additionally the pre-buy effect that typically boosts sales in advance of upcoming emissions legislation (that comes into effect in 2010) would appear to be significantly muted or non-existent this year. In Europe, after strong conditions in the first half of 2008, demand has since plummeted with 2009 industry volumes expected to drop by as much as 50% over prior year levels.

In the construction equipment sector, global demand also fell sharply in the latter portion of 2008 and through the first quarter of 2009, worldwide construction activity is down 48% year-over-year.
However, notwithstanding the severe cyclical downturn, DBRS notes that Volvo’s competitive position has remained firm. In trucking, the Company has achieved market share gains in all major regions with the exception of North America, where modest share losses have resulted given firm pricing strategies and a deliberate reduction in (typically less profitable) fleet sales. In construction equipment, Volvo’s global share in general purpose equipment has remained constant.
DBRS also notes that through the downturn, liquidity has remained reassuringly stable with Volvo continuing to enjoy solid access to credit markets despite the global financial crisis. Through May 2009, the Company closed three capital market transactions and five bank loans of a total amount of more than SEK40 billion. Additionally, the maturity schedule of the industrial operations debt portfolio is favourable, with the majority of debt due after 2012.

Volvo has implemented several counteractive measures in order to lessen the effects of the downturn, including sharp production cutbacks and reductions of its workforce. Additionally, Volvo’s working capital absorption should moderate and eventually reverse itself, resulting in a source of cash for the Company. DBRS notes that most of Volvo’s segments are beginning to generate positive cash flow in recent months with an improving trend; although the seasonal summer production cutback will likely present further challenges in this area. As such, free cash flow will likely be constrained but should stabilize through the end of the third quarter, although DBRS expects a significant improvement in cash flow in the final quarter of the year. In the event that Volvo is not able to control its losses and debt levels continue to increase through the end of 2009, a downgrade of the ratings would likely result.

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).