DBRS Confirms Ratings of BMW AG at “A,” Trend Remains Positive

DBRS Limited (DBRS) has today confirmed the long-term ratings of BMW AG (BMW or the Company) and its subsidiary BMW Canada Inc. (based on the guarantee of the parent) at “A.” The trend on the ratings (initially assigned in May 2015) remains Positive. DBRS acknowledges that BMW’s financial performance remains on track, with the Company continuing to achieve record sales and strong earnings performance in 2015 through early 2016. However, DBRS notes that the automotive industry and, by extension, BMW, currently faces developing headwinds in the form of the diesel vehicle emissions controversy (the Emissions Controversy), as well as slowing growth in emerging markets, notably China, the world’s largest automotive market. DBRS observes that BMW’s exposure to these headwinds is meaningful, with diesel vehicles representing the significant majority of the Company’s sales volumes in Europe, and with China being BMW’s single largest market, alone accounting for just over 20% of the Company’s 2015 global unit sales.

The Emissions Controversy (which commenced in the fall of 2015 amid the public disclosure that Volkswagen AG had, for several years, been applying defeat devices to undermine emissions testing procedures) has been progressively proliferating across the industry, with additional OEMs being subject to scrutiny. While DBRS acknowledges that BMW has publicly refuted using any form of defeat device to circumvent emissions testing, DBRS is nonetheless uncertain as to whether the Company can remain substantially unaffected by the Emissions Controversy. Diesel sales in Europe (by far the most important market for such vehicles) have thus far proven quite resilient, although demand could nonetheless materially weaken going forward amid ongoing negative publicity (stemming from the Emissions Controversy), with likely future revisions in associated legislation representing another challenging factor. DBRS acknowledges that BMW is well positioned across various powertrain technologies, including the internal combustion engine as well as hybrid and electric powertrains (the latter featuring prominently in the Company’s “i” sub-brand). This notwithstanding, BMW’s diesel exposure in Europe is substantial, with diesel vehicle sales typically representing roughly three-quarters of the Company’s continental volumes.

Regarding China, after undergoing substantial increases earlier in the decade (peaking in 2012, when BMW’s regional unit sales were 40% higher year over year (YOY)), growth has in recent years moderated. In 2015, amid local economic headwinds and erosion of wealth (attributable in part to a significant drop in the Chinese stock market), BMW’s Chinese sales increased by a mere 2% YOY. Moreover, sales of the Company’s ultra-luxury Rolls-Royce brand declined materially vis-à-vis 2014 (with this sharp local decline effectively causing Rolls-Royce to report a moderate drop in global sales last year). DBRS notes further that BMW’s moderating sales performance in China has also in part contributed to a slight narrowing (vis-à-vis its closest competitors) of the Company’s position as the world’s leading premium automotive manufacturer.

Notwithstanding the above-cited headwinds, DBRS acknowledges that BMW’s recent performance has remained strong, with its 2015 global sales of roughly 2.25 million units representing the fifth consecutive year that the Company has generated record sales volumes. Additionally, apart from Rolls-Royce (which represents a nominal proportion of the Company’s total automotive volumes), each of BMW and MINI achieved meaningful YOY growth of 5% and 12%, respectively. Sales gains also continue to be achieved across the Company’s geographic market segments (with the exception of a moderate decline in the United States in Q1 2016, mostly reflecting weaker demand for passenger cars). The Company’s earnings momentum remains on track, with the Automotive segment’s EBIT margin in 2015 and the trailing 12-month period ending March 31, 2016, amounting to solid levels of 9.2% and 9.1%, respectively, which (while nominally softer than the 9.6% level attained in 2014) remain well within BMW’s target range of 8% to 10%.

The Positive trend on the ratings recognizes that the Company’s financial metrics, given BMW’s strong earnings performance and conservative financial policy, remain at levels slightly exceeding the current ratings. Pending some additional clarity regarding the Emissions Controversy and absent any material weakening in BMW’s financial performance despite ongoing headwinds in certain regional markets, DBRS would expect to upgrade the ratings in the near term.

Notes:
The Senior Unsecured Debt Rating of BMW Canada Inc. is based on the guarantee of BMW AG.

All figures are in euros unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Automotive Manufacturing Industry and Global Methodology for Rating Finance Companies, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.