DBRS Upgrades Daimler AG to “A” from A (low), Trend Remains Stable

DBRS Limited (DBRS) upgraded the long-term ratings of Daimler AG (Daimler or the Company) and its rated subsidiaries, Daimler Canada Finance Inc. and Daimler Finance North America LLC, to “A” from A (low). Concurrently, DBRS confirmed the associated short-term ratings at R-1 (low). The trend on all ratings remains Stable. The long-term ratings upgrade reflects the Company’s continually improving earnings over the past number of years, which has caused Daimler’s current financial risk assessment (FRA) to strengthen to a level greater than the previously assigned ratings. Moreover, the Company’s strengthened financial position provides considerable resilience to the diesel vehicle emissions issue (the Diesel Issue) and will allow the Company to fund its future capital obligations. As well, Daimler’s business risk assessment (BRA) has benefitted from the well-established momentum in its core Mercedes-Benz Cars (MBC) business that last year regained its position as the world’s leading premium automotive original equipment manufacturer (OEM) and remains on track to maintain that status in 2017.

Daimler’s operating performance remained solid in 2017, incorporating ongoing revenue growth and earnings that are consistent with the strong 2016 levels. MBC is on track to achieve record unit sales for the eighth consecutive year, with the segment’s profitability anticipated to increase significantly year over year (YOY) amid solid operating margins that are trending in line with the Company’s target of approximately 10%. Moreover, the profitability of Daimler Trucks (the Company’s second-largest industrial segment), which declined in 2016 amid challenging conditions in the North American Free Trade Agreement (NAFTA) region, is expected to rebound in 2017 (the collective earnings performance of Daimler’s smaller Vans and Buses segments is trending moderately weaker this year, albeit with margins at sound levels). DBRS also notes that the balance sheet of the Company’s industrial operations has slightly improved in 2017, rendering Daimler’s aggregate credit metrics at the upper end of the “A” rating category. DBRS points out that while the Company’s FRA is determined based on the gross debt levels of the industrial operations segment (i.e., excluding industrial cash balances as well as intercompany receivables from the Daimler Financial Services segment), DBRS also recognizes that the industrial operations segment is generally a material net creditor to the Financial Services segment.

DBRS recognizes that the Diesel Issue remains a headwind confronting the industry. However, while the Diesel Issue has served to accelerate the structural decline in diesel vehicle sales in Europe (by far the largest diesel automotive market), DBRS observes that the decrease continues to be most pronounced in the compact car segments. In contrast, regarding larger-displacement diesel vehicles, where Daimler substantially participates, sales have remained resilient (with the Company’s European diesel sales through the first nine months of 2017 increasing in absolute terms vis-à-vis the same prior-year period), as these vehicles continue to present significant advantages in cost-of-ownership terms versus similar gasoline-based internal combustion engine models. Moreover, diesel vehicles remain a significant component in meeting regional carbon dioxide–based emissions regulations. Finally, DBRS notes that Daimler is well prepared to withstand the anticipated ongoing migration away from diesel vehicles, as the Company is well positioned across various powertrain technologies, including electric and hybrid powertrains; for example, Mercedes-Benz is already offering eight plug-in hybrid models, utilizing the Company’s modular system to institute hybrid powertrains across different vehicle segments.

Over the near to medium term, automotive sales conditions are estimated to remain somewhat favourable as global growth is expected to persist, primarily based on ongoing growth in Asia-Pacific (substantially China), marginally supplemented by slight projected increases in Europe; (other major market regions are expected to remain essentially flat on a collective basis). Accordingly, Daimler’s earnings are projected to remain at solid levels. While the Company faces increasing costs associated with further product and powertrain development, emissions compliance and future mobility initiatives (including autonomous driving and vehicle sharing/fleet management), these are estimated to be substantially offset by the Company’s strong liquidity position and future earnings/cash flow generation, with the latter likely being bolstered by the Company’s ongoing cost-efficiency efforts.

With the long-term rating upgrades, DBRS sees limited potential for additional positive rating actions over the foreseeable future given the high level of the current ratings compared with the industry average, with DBRS also taking into account Daimler’s relatively modest scale vis-à-vis the world’s largest auto manufacturers. Conversely, a significant industry downturn or marked shift in Daimler’s financial policy could potentially pressure the ratings. Finally, DBRS acknowledges the Company’s recently announced planned corporate reorganization that targets three legally independent entities (i.e., Mercedes-Benz Cars & Vans and Daimler Trucks & Buses becoming independent, in addition to the already legally independent Financial Services). DBRS notes that Daimler has stated that it has no current plans to divest of any individual divisions; moreover, any new organizational structure would not become effective prior to the 2019 shareholders’ meeting at the earliest. Therefore, the announcement, as such, has no impact on the current ratings, although the eventual implementation of any restructuring could potentially trigger an event-driven review of the ratings.

Notes:
All amounts are in euros 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 principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on our website under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

Daimler Canada Finance Inc. and Daimler Finance North America LLC are guaranteed by Daimler AG.