DBRS Morningstar Confirms Ratings on Daimler AG at “A,” Changes Trend to Negative from Stable

DBRS Limited (DBRS Morningstar) confirmed Daimler AG’s (Daimler or the Company) Issuer Rating and Senior Debt rating at “A” as well as the Medium-Term Notes and Commercial Paper ratings on Daimler Canada Finance Inc. and the Senior Debt and Commercial Paper ratings on Daimler Finance North America LLC at “A” and R-1 (low), respectively. DBRS Morningstar also changed the trend on the long-term ratings to Negative from Stable and maintained the trend on the short-term ratings at Stable as, pursuant to DBRS Morningstar’s debt rating scales, the R-1 (low) rating maps consistently with both the “A” and A (low) long-term ratings. The rating confirmation incorporates the Company’s solid business risk assessment as a global leader in both the premium automotive and truck segments. The trend change on the long-term ratings reflects Daimler’s recently weaker earnings that have adversely affected credit metrics. Moreover, the Company faces structural headwinds in its core automotive business that could further undermine future operating performance such that Daimler’s financial risk assessment would no longer be compatible with the current ratings.

The Company’s industrial profitability in 2019 (adjusted to exclude exceptional items) is trending materially lower year over year, which reflects declining earnings in the core Mercedes-Benz Cars (MBC) segment caused by slightly moderating volumes; softer pricing amid a weakening global automotive environment; and ongoing cost increases associated with future product and technology development, among other factors. While these cost headwinds, particularly Daimler’s electrification efforts, were expected, DBRS Morningstar assumed that their impact on automotive margins would be mitigated by ongoing efficiency initiatives; firmer product mix, given the continuing proportionate sales growth of the Company’s sport-utility vehicle models; and pricing power, reflecting the Mercedes-Benz brand’s leading position in the premium automotive segment. However, Daimler recently announced that global carbon dioxide regulations (especially those in Europe, which will be more burdensome from 2020 onward) and their associated costs and investment requirements will affect automotive margins more adversely than DBRS Morningstar previously anticipated over the near to medium term. DBRS Morningstar also notes that the performance of Daimler’s second-largest industrial segment, Daimler Trucks (DT), is estimated to soften as global truck volumes progressively contract from cyclical peak levels.

In response to these challenges, Daimler disclosed additional cost countermeasures, including targeted personnel and other variable cost reductions of more than EUR 1.5 billion at MBC and DT combined by year-end 2022. Moreover, capex and research and development outlays at MBC will be capped at 2019 levels and progressively reduce over the medium term.

DBRS Morningstar expects the premium automotive segment to be relatively resilient to the challenges facing the industry, with premium sales likely outpacing volumes of mass-market brands (as notably demonstrated in China this year) and the segment retaining some pricing power. However, in line with DBRS Morningstar’s trend change on the long-term ratings to Negative from Stable, further earnings decline or continued negative free cash flow generation could result in a rating downgrade within the next six to nine months.

Notes:
All figures are in euros unless otherwise noted.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2019), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at [email protected].

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS Morningstar used “Rating Companies in the Automotive Manufacturing and Supplier Industries” as the primary rating methodology in determining the rating of the parent company, Daimler AG. Subsequently, “DBRS Criteria: Guarantees and other Forms of Support” was applied in determining the ratings of Daimler Canada Finance Inc. and Daimler Finance North America LLC, both of which benefit from a Guarantee by Daimler AG. The Guarantee, in combination with DBRS Morningstar’s assessment of additional implicit support considerations including (but not limited to) business, reputational and financial factors that are deemed likely to motivate a parent or affiliated company to support its subsidiary issuer, result in a flow-through of Daimler AG’s rating to Daimler Canada Finance Inc. and Daimler Finance North America LLC. “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” was applied to ensure that the provided liquidity in support of Daimler Canada Finance Inc.’s and Daimler Finance North America LLC’s Commercial Paper ratings was consistent with DBRS Morningstar criteria.

The last rating action took place on November 29, 2018, when DBRS Morningstar confirmed its ratings on Daimler AG and related entities at “A” with a Stable trend.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s trends and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources
Initial Rating Dates: Daimler AG – August 29, 2000
Daimler Canada Finance Inc. – May 19, 1995
Daimler Finance North America LLC. – November 14, 2016

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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