Fitch Ratings has affirmed Daimler AG's and Volkswagen Group's Long-term Issuer Default Ratings (IDR) and senior unsecured notes at 'A-' and Short-term IDR at 'F2'. Fitch has also revised Volkswagen's Outlook to Positive from Stable. The Outlook on Daimler's Long-term IDRs is Stable. A full list of rating actions is at the end of this release.
"Both Daimler and Volkswagen are comfortably positioned in their current ratings, thanks to solid credit metrics for the rating category, strong diversification, leading positions in their respective markets and robust growth prospects", says Emmanuel Bulle, Senior Director in Fitch's European Corporates team. "In addition, Volkswagen's substantial cash pile and free cash flow generation provide the group with significant headroom in its ratings and should enable it to absorb further expected investment without impairing key credit metrics."
Fitch considers Volkswagen's business profile to be at the top end of the sector. Volkswagen Group's ratings are supported by an unparalleled product portfolio combining premium and large mainstream brands, broad geographical diversification, leading and increasing market shares and an unrivalled potential for cost savings and economies of scale.
Volkswagen's profitability is also above sector average. Operating margin improved again in 2011 to 7.1% from 5.6% in 2010, excluding the robust double-digit margins from its Chinese operations reported as joint ventures. Margins are set to remain strong in the coming years as the group benefits from significant synergies between its various brands and its modular strategy to share costs. Fitch expects the aggressive pricing environment in Europe to weigh somewhat on margins in 2012, but this should be mitigated by still solid margins in other regions.
Liquidity is also healthy, supported by a high net cash position from industrial operations and Volkswagen's substantial free cash flow generation ability. Reported automotive net cash (before adjustments for operating leases, EUR6.4bn at end-2011) was EUR15.8bn at end-Q112, slightly up from EUR15bn at end-2011, including EUR8.1bn of financial debt and EUR23.9bn of gross liquidity (industrial operations).
The ratings also incorporate lingering M&A risk and corporate governance relatively weaker than close peers. In particular, resolution of the merger with Porsche remains uncertain in its form, timing and cost. The two companies may exercise a series of put/call options but are currently looking at options to minimise a substantial tax burden of up to EUR1bn that would be triggered if the options are exercised before H214. Fitch also believes that the group is likely to consolidate its stake in the truck sector and further increase its participation in heavy-truck makers Scania and/or MAN. The recent acquisition of motorcycle manufacturer Ducati is another illustration of ongoing M&A risk.
The Outlook revision to Positive on Volkswagen's ratings is chiefly driven by Fitch's opinion that the group will be able to accommodate the cash outflow related to the Porsche transaction without jeopardising its financial profile. However, the Outlook could be revised back to Stable if the costs and cash outlay related to this deal are much above Fitch's current conservative-case assumptions of up to EUR5bn. An unfavourable timing for this transaction, for example if it happens during a sharp slowdown or if it is combined with other significant cash outflows (including other M&A or accelerated capex investments) could also lead to a deterioration of credit metrics and a stabilisation of the Outlook.
Daimler's ratings are supported by its solid market shares in the premium passenger car segment, as well as the van, bus and heavy-truck sectors. Fitch expects the group's MBC division (Mercedes Benz and smart brands) to maintain a strong growth in the foreseeable future, from continuously high and profitable demand in emerging markets, notably China, and the group's current product offensive. The heavy-truck division (Daimler Trucks - DT) will also benefit from the comprehensive product launch started in 2011.
The group's financial profile is solid, backed by an extremely healthy liquidity. The group has historically reported a strong net cash position. Before adjustment for operating leases (EUR4bn at end-2011), net industrial liquidity excluding currency hedges was EUR12.4bn at end-2011. Profitability is robust but Fitch notes that Daimler's operating profit still lags behind its main German peers BMW and Audi. Although this does not directly constrain ratings as margins above 7-8% are already comfortable for the current ratings, this indicates a lower efficiency but also potential for further progress on the cost structure as Daimler is keen on being at par with its domestic peers.
Daimler's ratings remain constrained by the typically high cyclicality and volatility of the heavy-truck sector, which can pull down group's profitability during industry or economic downturns. Evidence that the cyclicality of the truck division has diminished, in particular if DT manages to post more stable and of at least 3% EBIT margin even during downturns, could lead to an upgrade. More generally, a positive rating action could be triggered by the group meeting both of its main targets for MBC and DT profitability (10% and 8% EBIT margin through the cycle, respectively).
The rating actions are as follows:
Daimler AG:
Long-term IDR affirmed at 'A-'; Outlook Stable
Senior unsecured debt affirmed at 'A-'
Guaranteed notes affirmed at 'A-' and 'F2'
Short-term IDR affirmed at 'F2'
Commercial paper affirmed at 'F2'
Mercedes-Benz Australia/Pacific Pty. Ltd.:
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler International Finance BV:
Senior unsecured debt affirmed at 'A-'
Guaranteed notes affirmed at 'A-'
Short-term affirmed at 'F2'
Mercedes-Benz Japan Co. Ltd.:
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler Finance North America LLC:
Senior unsecured debt affirmed at 'A-'
Guaranteed notes affirmed at 'A-' and 'F2'
Short-term affirmed at 'F2'
Daimler Canada Finance Inc.:
Senior unsecured debt affirmed at 'A-'
Short-term affirmed at 'F2'
Mercedes-Benz South Africa (Pty) Ltd.:
Guaranteed notes affirmed at 'A-' and 'F2'
Daimler Mexico S.A. de C.V.:
Guaranteed notes affirmed at 'A-' and 'F2'
Volkswagen Group:
Long-term IDR affirmed at 'A-'; Outlook Revised to Positive from Stable
Senior unsecured debt affirmed at 'A-'
Short-term IDR affirmed at 'F2'
Additional information is available at www.fitchratings.com. Volkswagen: The ratings above were unsolicited and have been provided by Fitch as a service to investors. Mercedes and Daimler : The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Corporate Ratings Criteria', dated 13 August 2010 is available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Emmanuel Bulle, + 34 93 323 8411
Senior Director
Fitch
Ratings Espana. S.A.U.
85 Paseo de Gracia
08008 Barcelona
or
Secondary
Analyst
Eric Vogeler, +49 69 76 80 76 243
Associate Director
or
Committee
Chairperson
Frederic Gits, +33 1 44 29 91 84
Managing Director
or
Media
Relations
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com