The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has today affirmed the rating 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 continues to assess Daimler’s business risk profile at BBB+. The group has maintained its overall competitive position, with a stronger focus on the premium segment, which has historically outperformed the mass market segment. Daimler’s competitive position is supported by its solid market positioning despite intense competition in the premium space, on the back of a diversified product offering and the strong brand appeal of its core Mercedes-Benz brand, now supplemented by high-end brands and vehicles such as Maybach, AMG and G-Class. The group also benefits from a global geographical outreach in terms of sales and manufacturing footprint.

Daimler demonstrated strong resilience in 2020, thanks to accelerated cost reduction and favourable mix effects. The recovery which began in H2 2020 was confirmed in 2021, despite a heightened chip and components shortage, which limited vehicle availability. Against this backdrop, net pricing, an improved mix (reflected in record revenue per unit in the automotive division in Q3) and vigorous cost reduction led to a sharp rebound in adjusted EBIT margins and industrial free operating cash flow at end-September 2021. Scope has upgraded its profitability assessment based on its margin expectations for 2021 and 2022.

Scope views the 65% spin-off of the Trucks & Buses activities (effective since 10 December 2021) as neutral for Daimler’s competitive position. On the one hand, this move has reduced the group’s global scale and diversification. On the other hand, it removes a highly cyclical business which has historically generated operating margins below the group average and has failed to match the profitability of best-in-class truck players (Volvo, Paccar, Scania).

As far as CO2 compliance is concerned, Daimler overachieved its European CO2 targets for 2020 (average fleet emissions of 104.3g/km compared to a target of 106.6g/km based on the NEDC cycle). This was primarily thanks to a higher share of electrified vehicles (BEV/PHEV), totaling 7% of sales. With the accelerated ramp-up of its electrified vehicle portfolio (estimated share of 11%-12% at Mercedes-Benz Cars), Scope expects Daimler to meet its regulatory requirements in 2021 as well (based on the new WLTP cycle values).

Daimler’s strong financial risk profile (rated AA) remains the key support for the issuer rating. In 2020, Daimler managed to keep a sizeable net cash position (up 62% to EUR 17.9bn), despite the negative impact of Covid-19 on the group’s operations. This was due to significant free operating cash flow (EUR 8.3bn), reflecting successful cash preservation measures and improved operational performance in H2 2020. This net cash position was further enhanced throughout 2021, reaching EUR 23.5bn at end-September and around EUR 25bn(e) at year-end 2021 before spin-off effects (EUR 5-6bn in payouts to Daimler Trucks to provide the latter with an adequate equity base and liquidity position).

Scope’s view on Daimler’s financial risk profile is also supported by the group’s adequate liquidity. Unrestricted cash and cash equivalents comfortably cover all financial debt in the industrial business. In addition, Daimler benefits from an EUR 11bn undrawn revolving credit facility granted by an international banking consortium, maturing in 2025.

Supplementary rating drivers are credit-neutral. Daimler’s conservative financial policy is reflected in its strong credit metrics and Scope has no reason to believe this cautious financial policy will change. Corporate governance is also neutral.

Like all car manufacturers, Daimler faces pressure from tightening environmental regulations and the unavoidable trend towards carbon neutrality. Addressing these challenges will require substantial investments in new technologies, products and processes as well as a deep transformation in manufacturing processes and personnel competencies (ESG factor).

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s expectation of a clear improvement in Daimler’s operating profitability in 2021 and 2022 following the spin-off of the Trucks & Buses unit. Scope’s base case assumes a Scope-adjusted EBITDA margin significantly above 12% in the future, sustainably, on the back of more favourable trading conditions (including a recovery of global automotive markets) and continued benefits from product mix/pricing and internal efficiency measures. The Stable Outlook also reflects Scope’s expectation that Daimler will maintain a strong financial risk profile and solid credit metrics. 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 free operating cash flow in the industrial business turned negative on a sustained basis, triggered by an unexpected decrease in operating profits (EBITDA) owing to substantially lower sales volumes in the car and van divisions. Based on Scope’s perception of Daimler’s financial policy, the agency 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 if the group made a large acquisition funded by cash and debt. However, in light of the group’s investment discipline and refocused strategy, Scope does not view this as a likely scenario. A negative rating action would likewise be considered if Daimler’s Scope-adjusted EBITDA margin remained persistently below 8%, as this would prompt a negative adjustment to its 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 15% on a sustained basis.

Long-term and short-term debt ratings

Long-term senior unsecured debt has been affirmed at A, the same level as the issuer rating. Notes issued by Mercedes-Benz Australia/Pacific Pty Ldt, Daimler International Finance BV, Daimler Canada Finance Inc., Daimler Finance North America LLC and Mercedes-Benz Finance Co. Ltd benefit from an unconditional and irrevocable guarantee given by Daimler AG.

Daimler’s short-term rating, affirmed at S-1, is supported by better-than-adequate liquidity, strong access to capital markets and well-established banking relationships. Scope believes that Daimler would be able to address any short-term financing and refinancing requirements.

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

Methodology
The methodologies used for these Credit Ratings and/or Outlooks, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Automotive and Commercial Vehicle Manufacturers, 12 February 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-EU. 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 Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, third parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Georges Dieng ,Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 27 April 2017. The Credit Ratings/Outlooks were last updated on 3 February 2021.

Potential conflicts
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.

Conditions of use/exclusion of liability
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.