DBRS Morningstar Confirms AB Volvo at A (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at A (low) with a Stable trend. The rating incorporates the Company’s sound business risk assessment (BRA) as one of the world’s largest truck manufacturers and third-largest global player in construction equipment (CE). Moreover, while the Company stands to be meaningfully affected by the global outbreak of the Coronavirus Disease (COVID-19), DBRS Morningstar currently estimates that Volvo’s financial risk assessment (FRA) will nonetheless remain consistent with the current rating.

Volvo’s earnings momentum continued in 2019, with both revenues and operating income increasing for the fourth consecutive year and attaining record levels. Moreover, despite an anticipated softening across most major truck and CE markets, Volvo’s performance in Q1 2020 remained well in line with expectations (save for China, which was affected by the coronavirus early in the year) until mid-March, when the Company’s industrial activities in Europe, North America, and South America (as well as several other smaller jurisdictions) were shut down in a rapid manner. Consistent with its industrial peers, Volvo has implemented several countermeasures in response to the coronavirus, including, among others, reductions in operating expenses, salary decreases, short-term layoffs, and the minimization of capital expenditures. The Company began undertaking a progressive restart of its operations in late April through May across various regions. However, it remains to be seen how successful this resumption of production will be given concerns regarding the resiliency of the supply base as well as demand levels over the immediate term.

DBRS Morningstar notes that Volvo’s strong earnings performance in recent years in conjunction with its conservative financial policy (that includes maintaining a net industrial cash position under normal conditions) resulted in credit metrics that afforded significant cushion in the context of the current rating. While there remains considerable uncertainty over the ultimate severity and duration of the coronavirus pandemic, DBRS Morningstar notes that pursuant to the moderate scenario outlined in its commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” dated April 22, 2020, Volvo’s FRA and associated credit metrics are estimated to remain commensurate with the current rating (notwithstanding a material softening thereof). Additionally, DBRS Morningstar deems the Company’s current liquidity position (amounting to SEK 110 billion, or approximately USD 11 billion as of March 31, 2020) sufficient to absorb any currently foreseen coronavirus scenario.

DBRS Morningstar expects the rating to remain constant over the near term, with existing industry headwinds associated with the coronavirus effectively precluding a rating upgrade, with DBRS Morningstar noting further that Volvo’s current BRA also somewhat limits potential upgrades). Conversely, should the coronavirus pandemic develop further such that it readily approximates the adverse scenario as outlined in the above-cited commentary, this could result in negative rating pressure.

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.

Notes:
All figures are in Swedish kronor unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019); Rating Companies in the Industrial Products Industry (February 5, 2020); DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019); 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 rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have 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 (DBRS Morningstar) 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. DBRS Morningstar used “Rating Companies in the Automotive Manufacturing and Supplier Industries” as the primary rating methodology in order to assess Volvo’s Truck operations, which typically represent the significant majority of the Company’s industrial earnings. The application of “Rating Companies in the Industrial Products Industry” was used to assess the Company’s Construction Equipment business (the additional material contributor to industrial earnings, albeit to a significantly lesser degree than the Trucks segment). DBRS Morningstar considers the proportionate earnings derived from each of these two business segments when assigning relative weights to the respective methodologies. Additionally, “DBRS Morningstar Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers” was applied to determine the equity treatment of hybrid note issuance by Volvo. Finally, “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” was applied to assess the corporate structure of the Volvo group of companies.

The last rating action on this transaction took place on May 7, 2019, when DBRS Morningstar confirmed the Issuer Rating of Volvo at A (low) with a Stable trend.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: YES

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

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 Date: April 12, 2005

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

-- 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

-- Rating Companies in the Industrial Products Industry (February 5, 2020)
https://www.dbrsmorningstar.com/research/356434/rating-companies-in-the-industrial-products-industry

-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019)
https://www.dbrsmorningstar.com/research/352346/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-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