DBRS Morningstar Confirms PACCAR at AA (low) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of PACCAR Inc at AA (low). DBRS Morningstar also confirmed the Senior Unsecured Debt and Commercial Paper ratings of PACCAR Financial Ltd. (together with PACCAR Inc, PACCAR or the Company) at AA (low) and R-1 (middle), respectively. All trends remain Stable. The confirmation of the ratings continues to reflect PACCAR’s strong business risk assessment as a global premium truck manufacturer with a solid market position in North America and Europe, highly perceived product quality/brand strength, and considerable operating efficiencies. The ratings also incorporate the Company’s inordinately strong financial risk assessment given PACCAR’s consistent operating performance and essentially no industrial indebtedness (in line with its exceedingly conservative financial policy). Accordingly, while PACCAR will be affected by the global outbreak of Coronavirus Disease (COVID-19), DBRS Morningstar nonetheless estimates that associated adverse outcomes will be readily manageable by the Company.

PACCAR delivered solid operating performance in 2019 as expected, with revenues and operating profits (excluding financial services) increasing by 9% and 12%, respectively, year over year (YOY) to record levels. Truck deliveries in 2019 grew 5% YOY, primarily driven by strong demand in North America that more than offset moderate declines in Europe (with other regions also achieving meaningful growth). DBRS Morningstar notes that PACCAR’s relative market share performance across the Company’s various segments remained strong. Moreover, PACCAR continued to expand its aftermarket parts business, with revenues increasing to $4.0 billion, reflecting the higher population base of PACCAR trucks and engines in the market. Operating margins for the Company’s industrial operations improved to 11.1% in 2019 from 10.8% in 2018, in line with higher volumes and firmer pricing. Finally, PACCAR’s financial services also achieved good revenue and earnings growth, mainly as a function of higher average earning asset balances and yields in North America.

Going forward, DBRS Morningstar notes that, absent the effects of coronavirus, the global truck industry in 2020 was expected to undergo a moderate contraction from very strong levels, significantly reflecting projected declines in North America and Europe. While these stand to be meaningfully exacerbated by coronavirus, DBRS Morningstar also observes that the truck sector will nonetheless benefit from ongoing freight activity in support of trade and supply chains through the pandemic. Moreover, PACCAR’s performance will also be supported by its parts segment, which is more resilient to downturns, while also generating considerably firmer margins than its truck segment. Taking further into account the Company’s flexibility with respect to its labour force and its exceedingly strong balance sheet, DBRS Morningstar anticipates that PACCAR’s credit metrics will remain well commensurate with its current ratings despite the adverse effects of coronavirus. This notwithstanding, a prolonged global pandemic could potentially exert negative pressure on the ratings. Conversely, given that PACCAR’s ratings are already at a very high level compared with its peers, DBRS Morningstar sees limited potential for a positive rating action in the medium term.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar notes that the above press release was amended on May 11, 2020, to include links to all of the principal methodologies. The amendment was minor and would not impact the understanding of the reader.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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, PACCAR Inc. Subsequently, “DBRS Criteria: Guarantees and other Forms of Support” was applied in determining the ratings of PACCAR Financial Ltd, which benefits from a Keep Well Agreement with PACCAR Inc. The Keep Well Agreement, 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 PACCAR Inc’s rating to PACCAR Financial Ltd. “DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers” was applied to ensure that the provided liquidity in support of Paccar Financial Ltd.’s Commercial Paper rating was consistent with DBRS Morningstar criteria. Finally, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships was applied to assess the corporate structure of the PACCAR group of companies.

The last rating action on this transaction took place on April 10, 2019, when the ratings of the Company were confirmed.

For further information on DBRS 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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries and Sports Finance
Initial Rating Date: September 19, 2000

DBRS Morningstar 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 [email protected].

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

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), https://www.dbrsmorningstar.com/research/352181/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support, (January 22, 2020), https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 10, 2020), https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships