DBRS Morningstar Confirms BMW AG at A (high), Trend Remains Stable

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), all with Stable trends. The confirmations reflect BMW’s solid business risk assessment as a leading global original equipment manufacturer of premium automotive vehicles. Further, despite the significant industry headwinds in the form of supply base challenges, Coronavirus Disease (COVID-19) related lockdowns affecting certain jurisdictions globally, rising inflation and interest rates, and geo-political uncertainty, the Company’s financial performance has remained strong with the associated financial risk assessment (FRA) well commensurate with the assigned ratings.

Despite the ongoing challenges, most notably the global semiconductor shortage and pandemic-related lockdowns in China, which affected the Company's production schedules, BMW’s 2021 results improved significantly year over year, with earnings of the Company’s industrial operations increasing to levels higher than those attained prior to the start of the pandemic, primarily as a result of ongoing favourable demand levels across the automotive industry. Although automotive deliveries declined during H1 2022 (compared with H1 2021), the impact of lower unit sales on revenues was more than offset primarily by stronger pricing and favourable product mix. The Company’s industrial earnings for H1 2022 declined compared with the similar prior-year period as a result of higher depreciation and amortization charges resulting from the first-time consolidation of BMW Brilliance, the elimination of intercompany profits (also resulting from such consolidation), and cost increases (notably input cost inflation as a function of adverse logistics, raw material cost increases, and redundancies stemming from production interruptions), including higher research and development expenses. Additionally, earnings of the Company’s Financial Services business (for 2021 and H1 2022) attained very strong levels substantially as a function of favourable residual value performance reflecting on the ongoing low industry automotive inventory levels. For 2022, the Company is projecting the Automotive EBIT margin to range between 7% and 9% (compared with 10.3% achieved in 2021). DBRS Morningstar considers BMW's profit target to be readily attainable.

Going forward, DBRS Morningstar notes that the automotive industry faces meaningful challenges over the next several years in line with the increasing electrification of vehicles (as a function of emission regulations being tightened globally) amid ongoing investments in new mobility business initiatives. BMW remains well positioned to withstand these challenges given its (1) highly established presence in the premium automotive segment, which typically generates higher margins while also being more resilient to downturns; and (2) strong FRA, which reflects its consistent operating performance and conservative financial policy.

Consistent with the Stable trends, DBRS Morningstar expects the assigned ratings to remain constant over the medium term, with BMW solidly placed at the current rating category. Though unlikely, a negative rating action could result from a significant and sustained deterioration in operating results, leading to a material weakening in the Company’s FRA. Conversely, an upgrade is also unlikely and not anticipated over a similar time horizon in line with the meaningful cost challenges facing the industry, thereby likely precluding a further strengthening in BMW’s financial profile to positively affect the ratings.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represent a relevant factor as BMW is subject to a wide range of compliance requirements relating to (among other factors) CO2, fuel efficiency, and emission control. The Company has been actively investing in its vehicle-electrification strategy, which is part of the overall plan to invest more than EUR 30 billion in future-oriented technologies by 2025, with a target to have at least one fully electric model available for 90% of its current market segments by 2023. In addition, BMW is also targeting at least 40% reduction in CO2 emission per vehicle by 2030. In terms of contribution to sales, the Company is focusing on increasing the share of electric vehicle sales to 50% by 2030 (from the 2021 level of 13%).

While the environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to BMW. There were no social or governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in euros unless otherwise noted.

The methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 not 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 is an unsolicited credit rating.

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

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, 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: NO
With Access to Internal Documents: NO
With Access to Management: NO

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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Timothy O’ Brien, Senior Vice President, Diversified Industries
Initial Rating Date: BMW AG August 17, 2006
BMW Canada Inc. May 10, 2013
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 14, 2021;
https://www.dbrsmorningstar.com/research/385892);
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683)