DBRS Confirms Daimler at A (low)

DBRS has today confirmed the long- and short-term ratings of Daimler AG (Daimler or the Company) and its related companies at A (low) and R-1 (low), respectively. The confirmation reflects the Company’s strong business profile based on its leading positions in premium automotive vehicles and in trucks. The trend on the ratings remains Stable. While DBRS acknowledges that the Company’s recent weak financial results and associated credit metrics are not commensurate with the current ratings, DBRS notes that these are a function of a severe cyclical downturn resulting in sharp volume declines across most major automotive and trucking markets. DBRS also observes that Daimler has been able to maintain a moderately leveraged balance sheet and ample liquidity through the global financial crisis. In addition, it would appear that the downturn has bottomed out as the Company’s performance through the first nine months of 2009 has been progressively improving. In the most recent quarter, Daimler’s core Mercedes-Benz Cars (MBC) segment reverted to profitability, which also led to positive results on a consolidated basis. DBRS expects this trend of gradual improvement to continue, although significant headwinds persist as demand in both the automotive and trucking industries remains at very weak levels relative to historical norms.

The truck industry remains challenging across all major geographic markets. In Asia, volumes are lower, with the primary Japanese market in consistent decline for several years. In North America, the industry has also been contracting since 2007; the pre-buy effect that typically boosts sales in advance of upcoming emissions legislation would appear to be highly muted or even non-existent this year. In Europe, after strong conditions in the first half of 2008, demand has plummeted, with 2009 industry volumes expected to drop by more than 40% over prior-year levels. However, DBRS notes that the relative market performance of Daimler Trucks (DT) has nonetheless been solid, with the truck segment maintaining share or achieving gains in most regions. Additionally, DT has initiated several countermeasures to help mitigate the negative earnings impact of the industry downturn, the most significant of which is personnel reductions. Yet given the extent of the trucking downturn, DBRS expects this segment to incur an operating loss and negative cash flow this year. While 2010 results are expected to moderately improve, it remains unlikely that profitability will be significantly above break-even levels. However, DBRS notes that DT, as the world’s largest manufacturer of heavy- and medium-duty trucks, remains well positioned to benefit from the eventual recovery in a sector that could begin to emerge by 2011. Future performance should be bolstered by the segment’s current efficiency improvements, as well as by new production facilities such as the Saltillo, Mexico plant.

In the automotive sector, 2008 annual sales volumes were at well more than ten-year lows in each of the United States, Western Europe and Japan. Additionally, through the first nine months of 2009, while Europe was somewhat buoyed by the successful implementation of various vehicle scrappage programs across the continent, sales were still relatively weak while volumes in the United States and Japan remain at very poor levels (U.S. sales rose sharply in August as a result of the Car Allowance Rebate System program; however, upon the conclusion of this program, September sales retrenched heavily, with volumes in October only moderately rebounding). Going into 2010, the outlook remains lacklustre. Sales in Europe are likely to be further adversely impacted by demand pulled forward by current incentive programs, while in the United States, volumes are expected to moderately increase, although a significant recovery is not expected to commence until 2011. However, DBRS notes that MBC has proven rather resilient through these severe industry conditions as sales performance has been improving throughout 2009, despite minimal benefits derived from various vehicle scrappage incentive programs, which typically boosted the sales of small entry-level vehicles.

From January through April, the year-over-year decrease in the automotive segment averaged 24%; however, from May to September, the average decline was reduced to 10% relative to strong 2008 levels. The improving performance at MBC is attributable to new product introductions, the most significant being the new E-Class, which has been very well received since its launch earlier this year (the new S-Class was also recently introduced). DBRS notes that the improving product cadence has significantly bolstered MBC’s sales mix, with the E-Class, S-Class and ML/R/GLK/GL/G-Class models accounting for approximately 42% of total vehicle sales in Q3 2009; this should benefit future margins. DBRS also observes that MBC has been generating strong sales increases in emerging markets such as Brazil and China, which are expected to become significant markets for the Company over the long term. Furthermore, as the Company redeemed its 19.9% interest in Chrysler in Q2 2009, future performance (apart from agreed-upon payments to Chrysler’s pension plans totalling US$600 over the next three years) will no longer be affected by Chrysler.

DBRS notes that Daimler’s financial profile has not been immune to the negative impacts of the economic downturn, with profitability and coverage-based metrics sharply weaker than historical levels and not compatible with the current ratings. However, DBRS also notes that the Company’s balance sheet has remained robust, with net debt-to-total capitalization as of September 30, 2009, being less than 20%. Furthermore, liquidity continues to be ample, with industrial operations liquidity further reinforced through a 10% capital increase by way of a EUR1.95 billion equity investment by Aabar Investments PJSC of Abu Dhabi.

Going forward, DBRS expects the Company on a consolidated basis to incur an operating loss in 2009, as negative results in the first half of the year should more than offset progressively improving results in the final two quarters. Free cash flow should, however, be positive, largely as a result of significant cash generated from working capital (primarily through inventory reduction). DBRS expects the Company’s balance sheet and liquidity position to remain solid. DBRS notes that over the long term, Daimler remains very well positioned to benefit from the recovery of the automotive and trucking industries, although a significant upturn in either sector is not forecast prior to 2011. However, the ratings are expected to remain constant over the near to medium term, in line with financial performance that is projected to gradually improve. In the event that the Company again incurs significant losses that would have a materially adverse impact on its financial profile, negative rating actions would likely result.

Notes:
All figures are in euros unless otherwise noted.

The long- and short-term debt issued by Daimler Canada Finance Inc. and Daimler North America Corporation is guaranteed by Daimler AG.

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

This is a Corporate rating.