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Rating action

Scope Ratings GmbH (Scope) has affirmed the A/Stable issuer credit rating of Mercedes-Benz Manufacturing Hungary Kft. (MBMH). The instrument rating on the bond (HU0000359492) issued by MBMH and guaranteed by Daimler AG has been affirmed at A.

Rating rationale

MBMH is a wholly owned subsidiary of Mercedes-Benz AG and produces Mercedes-Benz compact vehicles (A-class including its hybrid versions, CLA Coupé and CLA Shooting Brake) within the global production footprint of its parent company. In H1 2021, MBMH started the production of the plug-in hybrid version of the A-class and prepared itself for the series production of the fully electric EQB slated for the end of 2021. MBMH is thus taking an active part in the electric offensive launched by Mercedes-Benz in 2020 and accelerated in 2021. MBMH produced over 160,000 vehicles at its Kecskemet plant in 2020.

MBMH is one of the largest companies in Hungary, with 4,200 employees in 2020. The rated entity has issued a HUF 40bn bond with a seven-year tenor under the Bond Funding for Growth Scheme of the Hungarian National Bank.

MBMH’s ratings are derived from the A rating of its guarantor, Daimler AG. The corporate rating reflects Scope’s view on Daimler’s implicit guarantee to MBMH, based on the latter’s name identity, brand responsibility and importance as a manufacturer for Daimler AG. The senior unsecured debt rating specifically reflects Daimler’s unconditional and irrevocable guarantee to debtholders of MBMH’s outstanding HUF 40bn bond.

The A rating on guarantor Daimler reflects its track record and Scope’s expectation that its key industrial division, Mercedes-Benz Cars & Vans will continue to hold strong market positions. Daimler’s geographic diversification, with a strong presence in both mature and developing markets, and the added diversification from the captive finance business, Daimler Mobility, further support its business risk assessment. The spin-off of 65% of Daimler Trucks, effective since 10 December 2021, reduces the group’s global scale and diversification but also removes the risk associated with a highly cyclical business, which historically generated operating margins lower than the group’s average.

Limiting factors for Daimler’s business risk assessment are its high capital requirements and investments in R&D to expand the product portfolio as well as the technological changes currently influencing the automotive industry, partly driven by tightening environmental regulations.

The key support for Daimler’s rating is its strong financial risk profile, supplemented by a supportive liquidity position. The group’s unrestricted and available liquidity (including marketable securities) exceeds the limited financial debt in its industrial unit. Together with Scope’s debt adjustments (for pension obligations and operating leases which moved onto the balance sheet in 2019), this results in a negative Scope-adjusted debt figure. The net cash position ultimately results in strong credit ratios: both ratios that are key for Scope’s assessment of automakers, Scope-adjusted debt/EBITDA and funds from operations/Scope-adjusted debt, are negative.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s expectation that MBMH’s guarantor, Daimler, will maintain a strong financial risk profile, the key support for the ratings. 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 Daimler’s industrial business turned negative on a sustained basis owing to a substantially lower unit-sales volume in its car/van division. 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 sustainably 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.

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 Outlook, (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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation        YES
With access to internal documents                                            NO
With access to management                                                      NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity 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 Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook 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 3 March 2020. 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.