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Rating action

Scope Ratings GmbH (Scope) has affirmed the A issuer rating on Mercedes-Benz Manufacturing Hungary Kft. (MBMH). The Outlook has been revised to Positive from Stable. The instrument rating on the bond (HU0000359492) issued by MBMH and guaranteed by Mercedes-Benz Group AG has been affirmed at A.

Rating rationale

MBMH is a wholly owned subsidiary of Mercedes-Benz Group AG and one of the largest companies in Hungary. In 2021, the company had over 4,400 employees and produced around 135,000 vehicles at its Kecskemet plant. The company generated net revenues of EUR 3.1bn and profit after tax of EUR 67m in 2021. MBMH produces Mercedes-Benz compact vehicles (A-Class including hybrid versions, CLA Coupé and CLA Shooting Brake) as part of the group’s global production. In 2021, MBMH started production of the plug-in hybrid version of the A-Class in April and launched the series production of the all-electric compact EQB SUV in October. Like the rest of the industry, the semiconductor shortage hindered MBMH’s production in 2021 and 2022, leading the company to prioritise higher-margin vehicles and electrified models, in keeping with Mercedes-Benz Group’s strategy. In 2023, the continued ramp-up of EQB production should drive MBMH’s activity.

MBMH is active in Mercedes-Benz Group’s electric offensive and will benefit from the realignment of the group’s global manufacturing network, announced in June 2022. From 2024, MBMH will start production of entry luxury models based on the MMA flexible compact architecture. Another important milestone will be reached in 2025 with a complete overhaul of the product portfolio and the addition of all-electric core luxury models.

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, Mercedes-Benz Group AG. The corporate rating reflects Scope’s view on Mercedes-Benz Group’s implicit guarantee to MBMH, based on the latter’s name identity, brand responsibility and importance as a manufacturer for Mercedes-Benz Group AG. The senior unsecured debt rating specifically reflects Mercedes-Benz Group’s unconditional and irrevocable guarantee to debtholders of MBMH’s outstanding HUF 40bn bond.

The A rating on guarantor Mercedes-Benz Group AG reflects Scope’s view that Mercedes-Benz Group’s issuer rating continues to be strongly supported by its financial risk profile but somewhat constrained by its business risk profile. The latter could, however, benefit from a potentially higher profitability assessment as a consequence of the ongoing premiumisation strategy.

The business risk profile remains at BBB+. The group has maintained its overall competitive position despite its reduced size and diversification following the spin-off of Daimler Trucks in December 2021. Over the past decade, despite intense competition in the premium space, Mercedes-Benz Group reinforced its market position on the back of a diversified product offering and the strong demand for its core Mercedes-Benz brand, supplemented by high-end brands and models such as Maybach, AMG and G-Class.

However, the group’s market position has been challenged in the last two years by the market share erosion at Mercedes-Benz Cars and, to a lesser extent, at Mercedes-Benz Vans. Reasons for the lost momentum at Mercedes-Benz Cars, besides product cycle effects, are the ‘value over volume’ strategy and the shift toward the upper-premium/luxury segment. This strategy and the associated technological push should strengthen brand perception and positioning, supported by a proper execution of the ambitious electrification strategy. In terms of the product cycle, Mercedes-Benz Cars should regain some momentum in 2023, thanks to the launch of the E family (core luxury) and the EQE SUV as well as numerous facelifts.

The group’s diversification by product and geography supports the business risk profile. The group has a significant presence in all key automotive markets, relevant in terms of premium demand. The group thus benefits from a global geographical outreach in terms of sales and manufacturing footprint. In terms of products, the group focuses on premium customers and is well-diversified across all vehicle categories. After a sizeable expansion of the product range over the past few years, the group is streamlining its portfolio to reduce complexity and focus on the biggest profit pools. The new strategy announced in May 2022 will involve a reshaped product portfolio and raise the brand’s centre of gravity. The ‘electric only’ strategy (previously ‘electric first') is improving product depth. Lastly, the globally diversified business is reflected in its captive finance activities (Mercedes-Benz Mobility), which support the dealer network, retail sales and mobility services.

After a resilient 2020 underpinned by positive price-mix effects and accelerated cost reduction, the sharp rebound in profitability was confirmed in 2021, primarily driven by the automotive division.

In 2022, the group overcame the impacts of the war in Ukraine and repeated pandemic lockdowns in China. Despite persistent semiconductor shortages and logistics bottlenecks, the group continued to deliver strong results, thanks to a recovery in volumes, healthy pricing, a favourable product mix and strict cost discipline. This prompted management to raise its guidance twice this year in Q2 and Q3. For the full year, Scope forecasts divisional margins in line with company’s latest guidance, with an adjusted EBIT margin of 14.5% for Mercedes-Benz Cars (guidance of 13% to 15%) and 10.4% for Mercedes-Benz Vans (guidance of 9%-11%). Scope-adjusted EBITDA margin is expected at 16.6%, up from 14.5% in 2021.

The outlook for 2023 is becoming more challenging due to weakening demand, rising interest rates and inflationary pressures. Scope expects Mercedes-Benz Group to remain resilient thanks to its premium repositioning, ability to pass on some cost inflation to customers and continued cost optimisation and efficiency gains. Scope forecasts the adjusted EBITDA margin to decline slightly to around 15% in 2023 before returning above 16% in 2024.

The financial risk profile remains strong at AA. This mainly reflects the prudent financial policy, with a sizeable net cash position in the industrial business. In 2021, the net cash position increased even further to EUR 21bn (from EUR 17.9bn at year-end 2020) despite a EUR 6bn cash transfer to Daimler Trucks as part of the spin-off. For 2022, thanks to the significant free operating cash flow anticipated (EUR 7.4bn) and despite the negative trend in working capital, net industrial cash should exceed EUR 27bn at year-end 2022. Scope forecasts a solid net cash position in 2023-2024 in spite of the more challenging business conditions, translating into strong credit metrics.

Free operating cash flow has stabilised after having been volatile over the past decade, thanks to drastic cash preservation, greater capex discipline and tight working capital management. Scope expects the industrial business to generate enough free operating cash flow to cover annual dividends.

The adequate liquidity also supports the financial risk profile. Unrestricted cash and cash equivalents comfortably cover all financial debt in the industrial business. In addition, Mercedes-Benz Group benefits from a EUR 11bn revolving credit facility granted by an international banking consortium. This facility was recently converted into a sustainability-linked loan, which included key environmental performance indicators such as on climate protection and CO2 reduction. This facility remains undrawn at year-end 2022.

Supplementary rating drivers are credit-neutral. The conservative financial policy is reflected in the group’s strong credit metrics and Scope has no reason to believe that the financial policy will change. Corporate governance is also neutral.

Like all car manufacturers, Mercedes-Benz Group faces rising pressure from tightening environmental regulations (including potential fines for non-compliance) and the race to carbon neutrality (ESG factor). Addressing these challenges requires substantial investments in new technologies, innovative drivetrains, battery capacities and software capabilities. It also entails a deep transformation in manufacturing processes and workforce competencies (notably via training, reskilling and upskilling existing personnel while hiring new talents with more specific profiles). With its Ambition 2039 plan, the group has defined a clear pathway to CO2-neutrality for its core business, along the whole value chain.

One or more key drivers of the credit rating action are considered ESG factors

Outlook and rating-change drivers

The Outlook revision from Stable to Positive reflects Scope’s expectation that the profitability of MBMH’s guarantor, Mercedes-Benz Group, will structurally improve and show strong resilience in 2023 amid deteriorating market environment and inflationary pressures. The agency’s base case assumes adjusted EBITDA margin of above 16% in 2022, around 15% in 2023 and slightly above 16% in 2024. Scope anticipates that Mercedes-Benz Group’s profitability will be supported by strict cost discipline, enhanced pricing power as well as a richer mix driven by the portfolio reshaping toward the higher end of the premium segment. The positive Outlook also reflects Scope’s expectation that Mercedes-Benz Group will maintain a strong financial risk profile and solid credit metrics, even in a less supportive environment in the next 12-18 months. Scope-adjusted debt is expected to remain negative with no meaningful incremental gross financial debt in the industrial business.

Scope would consider an upgrade if Mercedes-Benz Group succeeded in generating EBITDA margins sustainably higher than 15%, combined with strong cash flow generation and continuous net cash position in its industrial business, translated into solid credit metrics. Mercedes-Benz Group’s increased focus on brand premiumisation, cost optimisation and profitability enhancement would thus support a rating upgrade.

The agency could return to a Stable Outlook if Mercedes-Benz Group fails to reach adjusted EBITDA margin above 15%. Scope sees further downside should the group’s EBITDA margin fall back to around 12%. This could be driven by more challenging industry business conditions or poor execution of the group’s premium and electric drive strategy.

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, (General Corporate Rating Methodology, 15 July 2022; European Automotive and Commercial Vehicle Manufacturers Rating Methodology, 11 February 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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                                              YES
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/Outlook were first released by Scope Ratings on 3 March 2020. The Credit Ratings/Outlook were last updated on 28 January 2022

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
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