DBRS Morningstar Confirms BMW AG at A (high) with a Negative Trend; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of BMW AG (BMW or the Company) as well as the Senior Unsecured Debt rating of its subsidiary, BMW Canada Inc., at A (high). The trend on the ratings is Negative. Pursuant to the moderate scenario as outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (initially dated April 22, 2020, and most recently updated on September 10, 2020, as indicated in the following document “Global Macroeconomic Scenarios: September Update”), DBRS Morningstar estimates that the Company’s financial risk assessment (FRA) will remain at levels commensurate with the existing ratings despite an anticipated softening of BMW’s credit metrics given the global escalation of the Coronavirus Disease (COVID-19). The Negative trend, however, reflects ongoing significant headwinds facing the automotive industry and uncertainty about the progression of the coronavirus pandemic, specifically with respect to its likely subsequent impact on sales or production levels. With this rating action, BMW’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar notes that prior to the coronavirus pandemic, the Company’s FRA was at very strong levels (providing moderate cushion even in the context of the current ratings) given BMW’s conservative financial policy and consistent operating performance. While DBRS Morningstar acknowledges that the Company’s recent Automotive margins were softening somewhat, this was significantly a function of cost headwinds in the form of vehicle electrification investments and new mobility initiatives that also affected several of BMW’s peers. Consistent with other auto manufacturers, the coronavirus pandemic materially affected the Company’s operations globally, initially in China in January 2020 and subsequently across Japan, North America, and Europe, as well as several other smaller jurisdictions. Inversely following the trajectory of the pandemic, BMW’s results for the first half of 2020 (H1 2020) were correspondingly weaker compared with the similar prior-year period as vehicle sales of the Company’s Automotive operations declined to 963 thousand units (compared with sales of 1.25 million units in H1 2019), with the segment incurring an EBIT loss of EUR 1.3 billion (relative to a positive EBIT of EUR 1.2 billion generated in H1 2019). Currently, DBRS Morningstar anticipates BMW’s Automotive revenues to decline by approximately 20% compared with 2019 levels, with EBIT also being significantly affected, though it is projected to remain at modestly positive levels. With respect to free cash flow generation, this will decrease correspondingly with lower earnings, possibly exacerbated by negative working capital (although this stands to be meaningfully alleviated by disciplined inventory management with the Company rapidly adapting production levels in response to the pandemic).

DBRS Morningstar notes, however, that the adverse effects of the above on BMW’s industrial operations have been considerably alleviated by intragroup funding from the Company’s Financial Services segment, facilitated by the latter’s sizeable free cash flow generation in line with a contraction of its receivables portfolio. BMW’s industrial balance sheet and indebtedness have therefore proven resilient to the pandemic. Moreover, the Company’s access to the global capital markets has been unimpeded, with BMW’s EUR 8 billion syndicated credit also remaining undrawn. As such, DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.

Notwithstanding the negative effects of the coronavirus pandemic on global automotive sales and production, DBRS Morningstar nonetheless notes that the ensuing sales recovery across major jurisdictions has thus far moderately exceeded its expectations. Significantly, industry sales in China (the world’s single largest automotive market) reverted to year-over-year growth as of April 2020 (following an extended decline of close to two years) that has continued through to August, in which monthly sales increased by 11.6% relative to the similar prior year period (as indicated by the China Association of Automobile Manufacturers). Moreover, in the United States, where DBRS Morningstar acknowledges that the pandemic shows no signs of abating across several states, regional sales are nonetheless proving resilient, with the seasonally adjusted annual sales rate (SAAR) in August estimated to exceed 15 million units.

Consistent with the Negative trend on the ratings, DBRS Morningstar notes that a continued progression of the pandemic, such that it results in a material further softening of the Company’s FRA and credit metrics, could lead to additional downward rating pressures. Conversely, should the worst effects of the coronavirus pandemic be significantly contained through the first half of 2020 and followed by a meaningful recovery, the trend on the ratings could be changed to Stable.

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 euros 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), 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].

This 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. Specifically, DBRS used Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019) as the primary rating methodology in determining the rating of the parent company, BMW AG. Subsequently, DBRS Morningstar Criteria: Guarantees and other Forms of Support (January 22, 2020) was applied in determining the rating of BMW Canada Inc., which benefits from a guarantee from BMW 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 BMW AG’s rating to BMW Canada Inc. Finally, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships (November 25, 2019) was applied to assess the corporate structure of the BMW group of companies.

The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of BMW AG and BMW Canada Inc. Under Review with Negative Implications.

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: NO

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Dates: August 17, 2006

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

-- 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: 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