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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. Scope has also affirmed the A rating on senior unsecured debt issued by any of the entities listed as well as Daimler AG’s S-1 short-term rating.

Rating rationale

Scope has updated the rating case on Daimler AG (Daimler) since the last rating review in June 2020, mainly to capture developments in the global automotive markets in the second half of 2020. The Scope-adjusted EBITDA margin for 2020 was calculated at around 9%, based on Daimler’s solid preliminary results. While the Covid-19 pandemic left its mark on 2020 volumes, it had less of an impact on overall profitability than anticipated at the onset of the crisis.

Going into 2021F, Scope foresees that various factors will have a positive impact on profitability: the mix effects from the new S-Class, good pricing for the high-margin SUVs (GLE, GLS), first effects from the cost-reduction programmes on both fixed and variable production costs, and contributions margins from the expected rebound of volumes in 2021. Scope cautiously expects volume growth in 2021 of 9% for MB Cars & Vans and 17% for Daimler Truck & Bus following an estimated decline of almost 30% in 2020. Daimler’s preliminary profit data for 2020 give a good indication that last year’s weakened profitability will not persist. This is in line with Scope’s earlier assessment that Scope-adjusted EBITDA margins of below 8% are unlikely to be permanent. The business risk profile assessment is likewise unchanged, with Scope’s view on market position and business diversification being the same as in the previous rating review.

Daimler achieved its CO2 targets for 2020, having sold about 7% of electrified (PHEV/BEV) vehicles in that year. Scope also expects CO2 targets in 2021 to be met, in view of the planned share of about 13% of electrified vehicles at Mercedes-Benz Cars. Any minor shortfall on the target is unlikely to negatively affect the overall business risk profile.

The key support for the rating remains the strong financial risk profile. Entering the Covid-19 pandemic, Daimler had significant surplus liquidity that could cover reported financial debt in its industrial business (Scope’s debt calculation adjusted for pension obligations, with operating leases having moved onto the balance sheet in 2019). Scope-adjusted debt is negative (net of cash), which resulted in the strong credit ratios. Scope also expects the credit ratios to stay negative given that Scope-adjusted debt will remain negative. Daimler’s preliminary data for 2020 suggest that free operating cash flow (FOCF) in the industrial unit was EUR 8.3bn, reflecting EUR 4.8bn on top of the EUR 3.5bn reported for 9M 2020. The significant FOCF reflects Daimler’s ongoing cash preservation measures and operating performance in the second half of 2020. The earnings effects in 2021, combined with a further focus on fixed-cost reduction, including selective capital spending, should support positive FOCF in the medium term. Cash effects from accruals booked in 2019 for legal proceedings will lower FOCF from the industrial business, but we expect overall FOCF to stay positive and exceed projected dividend payments in 2021 and 2022.

Scope’s positive view on the financial risk profile is supplemented by the group’s adequate liquidity. Unrestricted cash and cash equivalents collectively exceed all financial obligations in the industrial business. In addition to a EUR 11bn undrawn revolving credit facility, granted by an international banking consortium and maturing in 2024 with an extension option of one year, a new EUR 12bn credit facility was arranged in April 2020 with a maturity of 12 months and two extension options of six months. During its capital markets day in November 2019, Daimler likewise communicated a minimum net liquidity goal of EUR 10bn for 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. Scope-adjusted debt is expected to remain negative with no meaningful incremental financial debt in the industrial business, if any.

Scope would consider a negative rating action if FOCF in the industrial business turned negative on a sustained basis, triggered by an unexpected decrease in operating profits (EBITDA) owing to a substantially lower unit-sales volume in the 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, by 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’s Scope-adjusted EBITDA margin failed to reach above 8% in the medium term, as this would prompt a negative adjustment on the business risk profile.

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

Long-term and short-term debt ratings

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

Daimler’s short-term rating has been affirmed at S-1, supported by the better-than-adequate liquidity, good banking relationships and strong access to capital markets. Scope believes that Daimler can address any short-term financing and refinancing requirements.

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, 26 February 2020; Rating Methodology: Automotive and Commercial Vehicle Manufacturers 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 Ratings’ 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. The credit rating and/or outlook is UK endorsed.
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 24 June 2020

Potential conflicts
Please see www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of credit ratings.
 
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