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Rating action

Scope Ratings has affirmed the ratings of A/Stable on Daimler AG, Daimler International Finance B.V., Daimler Canada Finance Inc., Daimler Finance North America LLC, Mercedes-Benz Japan Co. Ltd., and Mercedes-Benz Australia/Pacific Pty Ltd. The ratings of senior unsecured debt issued by any of the entities listed have been affirmed at A. The short-term rating assigned to Daimler AG has also been affirmed at S-1.

Rating rationale

We have reviewed Daimler’s business risk profile in view of the expected decline of global light vehicle markets in 2020F following the effects from the Covid-19 pandemic. On the business risk, we do not see any changes to the market position and/or diversification but view the assessment of profitability weaker. We expect Daimler to report a Scope-adjusted EBITDA margin (key adjustment being capitalized development costs) to be around 5%-6% in 2020F. This follows the weak operating profitability (EBITDA) in 2019 which was affected by costs for provisioning for legal proceedings in conjunction with diesel engines. Adjusted for the special items booked in 2019, the Scope-adjusted EBITDA margin of Daimler was around 9% with capitalized development costs being the key adjustment that we make to reported figures. Going forward, we do not believe that Scope-adjusted EBITDA margins at levels of below 8% or below will be a permanent feature of Daimler’s business activities. As a reference, a Scope-adjusted EBITDA margin of less than 8% would imply that Daimler’s inherent level of profitability in its industrial business would have to be reported EBIT margins of around 4% for both MB Cars & Vans and Daimler Trucks & Buses.

In our forecast, we have not fully incorporated the effects from the cost reduction program such as a planned reduction of personnel costs of EUR 1.4bn by 2022 announced by Daimler in fall 2019. During its capital markets day (Nov. 2019), Daimler already informed that investments will be prioritized and the complexity of vehicle architectures to be addressed (reduction of platforms). Further benefits from variable cost reductions in both MB Cars & Vans and Daimler Trucks & Buses could materialize in addition to the plan of lowering the fixed costs. A key source of profit, the new S-class, will contribute to the group’s profitability in 2021 and beyond. For 2021, we forecast unit sales volumes to stay significantly below the peak levels observed in 2019. While the profitability assessment is now weaker, the overall business risk profile (consisting of more than just the profitability assessment) is unchanged. This is particularly true for our assessment of Daimler’s competitive position and diversification of operations.

The key support for the rating was and remains the strong financial risk profile. Daimler had significant surplus liquidity covering both reported financial debt in the industrial business (including our adjustment for pension obligations with operating leases having moved on-balance sheet in 2019) entering the Covid-19 pandemic. Scope-adjusted debt is negative. The negative Scope-adjusted debt (net cash) ultimately results in strong credit ratios. We also expect the credit ratios to stay negative given that Scope-adjusted debt will likewise remain negative. This is against our expectation that Daimler will very likely report a negative free operating cash flow in its industrial business (Mercedes-Benz Cars & Vans, Daimler Trucks & Buses) in 2020F. For 2021F, the assessment of the free operating cash flow generation depends on both the rebound of global light vehicle markets, Daimler’s successful execution of prioritizing capital expenditures, and the potential payouts related to the provisions that have been booked in 2Q19.

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 as communicated by Daimler during its capital markets day (Nov. 2019). Therefore, Scope-adjusted debt should remain negative, i.e. available unrestricted liquidity should continue to exceed financial debt and debt-like adjustments.

Liquidity is adequate. Unrestricted cash and cash equivalents exceed all financial obligations in the industrial business. In addition to its EUR 11bn undrawn revolving credit facility granted by consortium of international banks with maturity in 2024 plus extension option of one year, Daimler has arranged and additional credit facility EUR 12bn in April 2020. The new EUR 12bn credit facility has a maturity of 12 months with two extension options of six months and serves as a back-up facility for planned bond issuances. The EUR 12bn facility from April 2020 decreases congruently with the successful placement of public bonds by Daimler. During its capital markets day in Nov. 2019, Daimler has likewise communicated to have a minimum net liquidity goal of EUR 10bn in its industrial operations.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation that Daimler should keep a strong financial risk profile, the key support for the ratings. We expect Scope-adjusted debt to 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 on a sustainable basis owing to a substantially lower unit-sales volume in the key car/van and truck/bus 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. A negative rating action would likewise be considered if Daimler was not going to achieve Scope-adjusted EBITDA margins of above 8% in the medium term as this would be an indication for us to lower the business risk profile.

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

Long-term and short-term debt ratings

Long-term senior unsecured debt is affirmed at A, the level of the issuer rating.

Daimler’s short-term rating is S-1 and supported by the better than adequate provided liquidity, good banking relationships and strong access to capital markets. Scope believes that Daimler would be able to address any short-term financing and refinancing needs if necessary.

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, published on 26 Feb 2020; Rating Methodology Automotive and Commercial Vehicle Manufacturers, published on 14 February 2020 are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
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: the rated entity, third parties, public domain, 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 the issuance of the rating or outlook action, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0 .
Lead analyst: Werner Stäblein, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks on Daimler were first released by Scope on 27 April 2017. The ratings/outlook were last updated on 14 June 2018.

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
© 2020 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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