DBRS Confirms AB Volvo at BBB (high), Trend Remains Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at BBB (high) with a Stable trend. The confirmation recognizes the steady improvement in operating performance and the associated strengthening of the debt-coverage metrics. DBRS expects Volvo’s business risk profile to remain stable and its financial profile to remain compatible with the current rating despite headwinds in some key markets.

The Company launched a comprehensive transformation program (the efficiency program) at the end of 2013 to streamline its operations, reduce structural costs and increase efficiency. Most of the activities have been implemented as at the end of 2015. Volvo is on track to meet its expectation of full-year savings of SEK 10 billion from cost reductions in 2016 compared with full-year 2012 when measured in local currencies. Successful execution of the efficiency program will strengthen Volvo’s business profile, and the higher profit margin in the businesses in 2015 reflects realized benefits from this program.

Volvo reported strong improvement in operating results in 2015, which were supported by favourable conditions in most major markets. Stronger demand, benefits from the efficiency program and positive currency effects were key contributors. The positive momentum carried through to the first half of 2016 despite some emerging challenges, such as the ongoing correction in the North American truck market. Volvo’s balance sheet has also strengthened markedly since 2014 from deleveraging actions and the issuance of a hybrid bond (EUR 1.5 billion or approximately SEK 14.0 billion) with equity-like features. Gross debt leverage from Industrial Operations declined to about 22% at the end of 2015 from about 33% in 2014. Although higher working capital usage led to a rise in debt levels at the end of June 2016, the balance sheet remains solid.

Going forward, DBRS anticipates that Volvo will face meaningful headwinds in the Trucks and Construction Equipment businesses. Market conditions are expected to be more challenging in North America and Brazil for trucks and in Brazil and China for construction equipment in the last half of 2016 through to 2017. The economic effects of the pending exit of the United Kingdom from the European Union on Volvo’s key European markets is highly uncertain. DBRS expects operating earnings in 2016 and 2017 to likely be below 2015 levels. Nevertheless, increasing benefits from the efficiency program and solid results from Buses and Volvo Penta should somewhat moderate the deterioration in the Company’s overall operating results. DBRS also notes that Volvo has meaningful cushion in its financial profile to absorb poorer results, such as the anticipated weakness in 2016 and 2017, and remain compatible with the current rating. Hence, DBRS expects the current rating to remain stable in the medium term.

Notes:
All amounts are in Swedish krona unless otherwise specified.

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 methodology is Rating Companies in the Automotive Manufacturing Industry (October 2015), which can be found on our website under Methodologies.

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

This rating was not initiated at the request of the rated entity.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.