DBRS Morningstar Upgrades Rating on AB Volvo to “A” from A (low), Changes Trend to Stable from Positive

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of AB Volvo (Volvo or the Company) to “A” from A (low) and changed the trend on the rating to Stable from Positive. The rating upgrade reflects Volvo’s ongoing strong operating performance that, amid the Company’s conservative financial policy, has caused its credit metrics and financial risk assessment to strengthen to levels that exceed the formerly assigned rating. Moreover, the rating remains supported by Volvo’s sound business risk assessment (BRA) as one of the world’s largest truck manufacturers and a major global player in construction equipment.

DBRS Morningstar previously indicated (in its press release “DBRS Morningstar Changes Trend on AB Volvo to Positive from Stable, Confirms Rating at A (low)” dated May 4, 2022) that the Company’s ongoing solid operating performance would likely result in an upgrade of the ratings. Despite ongoing constraints related to the global semiconductor shortage and other supply chain challenges that continued to affect volumes, Volvo’s 2022 industrial revenues and profitability increased year over year to record levels. The firmer earnings incorporate higher vehicle/equipment volumes and firmer pricing amid favourable demand (supported by pent-up demand, with production across the Company’s businesses being curtailed for close to three years). Additionally, Volvo’s spare parts and services business (that generates higher margins while remaining more resilient to economic cyclicality) grew to record levels, with services representing 20% of the Company’s 2022 consolidated revenues. Volvo's financial services business also performed well with 2022 pre-tax earnings remaining essentially constant with strong prior-year levels. The Company's performance momentum continued in Q1 2023 (notwithstanding the ongoing slowdown in construction activity in the Chinese market), with industrial earnings sharply higher compared with Q1 2022 given increased vehicle volumes, higher service sales, and favourable pricing (these positive factors being partly offset by higher material and freight costs).

DBRS Morningstar expects Volvo’s financial performance to remain strong in 2023, with earnings likely moderately improving over record 2022 levels. While DBRS Morningstar recognizes economic headwinds looming across various regions, these are estimated to be considerably offset by the aforementioned pent-up demand persisting across the Company’s market segments. Volvo has indicated that its backlog provides sales visibility well into Q3 2023; as such, taking into account some potential softening in demand in the latter half of the year, on balance, DBRS Morningstar still anticipates that 2023 industry conditions will remain sound.

Consistent with the Stable trend, DBRS Morningstar expects the Company’s rating to remain constant over the near to medium term. Further positive actions are somewhat unlikely, as DBRS Morningstar is taking into account the aforementioned sizable cost and investment requirements facing the Company, with the rating also being somewhat underpinned by Volvo’s existing BRA. Conversely, significantly weaker earnings amid ongoing high investments—resulting in material negative free cash and thereby adversely affecting credit metrics—could have negative rating implications, although this is mitigated by the Company’s conservative financial policy and strong balance sheet, with Volvo’s industrial operations having a sizable net cash position.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor, as Volvo’s products are subject to a wide range of compliance requirements relating to (among other factors) carbon dioxide, fuel efficiency, and emissions control. The Company has been actively working toward a plan with the ambition of delivering 100% fossil-free products from 2040 onward and accordingly is investing in technologies that would support this ambition.

Although the Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends on Volvo’s ratings.

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 Swedish krona unless otherwise noted.

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022)
https://www.dbrsmorningstar.com/research/404042
-- Global Methodology for Rating Companies in the Industrial Products Industry (February 14, 2023)
https://www.dbrsmorningstar.com/research/409775
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022)
https://www.dbrsmorningstar.com/research/404248

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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].

The 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, management 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:

The last rating action on this transaction took place on May 4, 2022, when DBRS Morningstar changed the trend on AB Volvo to Positive from Stable while confirming the rating at A (low).

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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Managing Director, Global Head of Diversified Industries
Initial Rating Date: April 12, 2005

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on 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