Rating rationale

The corporate rating of A reflects the company’s track record and Scope’s expectation for a continuation of the strong market positions held by the group’s key divisions, Mercedes-Benz Cars and Daimler Trucks. Daimler’s geographic diversification, with a strong presence in both mature and developing markets, and the added diversification benefit from the captive finance business (Daimler Financial Services), is a further support for Scope’s business risk assessment. Limiting factors for the business risk assessment are the pronounced risk for negative cyclical volume changes, notably in the truck division; high capital requirements and investments in R&D to expand the product portfolio; and the technological changes currently influencing the automotive industry.

Automakers currently benefit from a favourable macro environment, which is showcased by low gasoline prices supporting volume sales of very profitable SUVs, low interest rates including availability of credit, a weakened euro, high demand for automobiles in China, positive consumer sentiment, and rebounding southern European markets. Daimler has likewise benefited from these developments over the past few years, in addition to positive effects resulting from new and successful car models. Consequently, Daimler’s financial risk profile is very strong and the key support for the A rating.

Daimler has limited financial indebtedness in its industrial business and considerable unrestricted liquidity. The group’s unrestricted and available liquidity (including marketable securities) exceeds financial debt in the industrial business as well as Scope’s debt-adjustments. Therefore, the Scope-adjusted debt figure is negative. The net cash position ultimately results in strong credit ratios, and the key credit ratios that Scope considers important for the assessment of automakers, i.e. Scope-adjusted debt/EBITDA and funds from operations/Scope-adjusted debt are both negative.

Scope’s positive view on the financial risk profile is supplemented by the supportive liquidity position of the group. Going forward, Scope expects the free operating cash flow in the industrial business to cover forecasted dividend payments. Therefore, Scope-adjusted debt should remain negative, i.e. available unrestricted liquidity should continue to exceed financial debt and debt-like adjustments.

Senior unsecured debt issued by Daimler AG, ratings assigned to financing companies, and debt issued by financing companies

Scope has assigned an A rating to senior unsecured debt issued by Daimler AG. This rating is likewise assigned to the financing subsidiaries of Daimler that issue under its Euro Medium Term Note Programme (EMTN). These financing subsidiaries are:

• Daimler International Finance B.V.
• Daimler Canada Finance Inc.
• Daimler Finance North America LLC
• Mercedes-Benz Japan Co., Ltd.
• Mercedes-Benz Australia/Pacific Pty. Ltd.

Senior unsecured debt issuances under the EMTN made by the above subsidiaries are unconditionally and irrevocably guaranteed by Daimler AG.

Key Rating Drivers

Positive

• Mercedes-Benz is a leading premium car manufacturer, with one of the strongest brands for premium cars worldwide
• Track record of successful product launches, facelifts, and extension of the product range at Mercedes-Benz Cars
• Broad geographic reach in its key divisions, Mercedes-Benz Cars and Daimler Trucks
• Broad regional distribution of sales across both mature and emerging-market regions
• Diversification benefits from captive finance operations, adding a source of operating profits outside manufacturing
• Strong financial risk profile providing a buffer for unexpected negative operating performance and substantial financial flexibility

Negative

• Strong risks of negative cyclical volume changes that may result from worsening consumer sentiment or less favourable economic environment
• Substantial investment required to develop hybrid and electric vehicles and to meet increasingly stringent emission standards
• Technological changes in the automotive industry that may change the competitive landscape
• Strong earnings risks in the commercial vehicle sector given the early-cycle nature of this industry

Positive rating-change drivers

• Continuation of strong financial position leading to headroom that may accommodate seriously negative volume developments at Mercedes-Benz Cars and Daimler Trucks
• Substantial technological advancements at Mercedes-Benz Cars, suggesting a technological lead for electrified vehicles

Negative rating-change drivers

• Deterioration of operating performance such as sustained market share losses in key markets (Europe/US) in either the passenger or truck division
• Change in financial policy towards higher shareholder remuneration, including share buybacks or larger-sized acquisitions - risks that we currently evaluate as being low
• Weakening of the liquidity position, including limitations to access public debt markets

Outlook

The Outlook is Stable and incorporates Scope’s expectation that Daimler should keep a strong financial risk profile. The rating case suggests that free operating cash flow generated in the industrial business is sufficient to cover projected dividend payments. Therefore, Scope-adjusted debt will very likely remain negative with no meaningful incremental financial debt in the industrial business, if any.

Scope would consider a negative rating action if free operating cash flow in the group’s industrial business turned negative, triggered by an unexpected decrease in operating profits (EBITDA) owing to a substantially lower unit-sales volume in the key car and truck divisions. In line with its perception of Daimler’s financial policy, Scope does not expect material changes to shareholder remuneration or any sizeable acquisitions. The ratings could be negatively impacted if Daimler’s financial policy became more aggressive, for example, engaging in a large acquisition funded by cash and debt. However, Scope does not view this as a likely scenario.

Scope would consider a positive rating action if Daimler was to continue its track record of a cautious financial policy including moderate dividend payouts, substantial liquidity, and strong credit metrics coupled with an improvement of the adjusted EBITDA-margin to levels above 12%.

For the detailed rating report, click here.

Stress testing & cash flow analysis
No stress testing was performed. Scope performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for this rating(s) and/or rating outlook(s) Corporate Rating Methodology and Automotive and Commercial Vehicle Manufacturers Methodology are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process. The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to publication, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory Disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Werner Stäblein, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 27.04.2017

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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