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Rating action

Scope Ratings GmbH (Scope) has today upgraded its issuer rating on Mercedes-Benz Manufacturing Hungary Kft. (MBMH) to A+/Stable from A/Positive. Scope has also upgraded the instrument rating on the bond (HU0000359492) issued by MBMH and guaranteed by Mercedes-Benz Group AG to A+ from A.

Rating rationale

The rating upgrade is based on the upgrade of the issuer rating of Mercedes-Benz Group AG (guarantor) to A+/Stable from A/Positive.

MBMH is a wholly-owned subsidiary of Mercedes-Benz Group AG and one of the largest industrial companies in Hungary. In 2022, MBMH produced over 152,000 vehicles (up 13% YoY) at its Kecskemet plant. The company achieved a strong financial performance with revenue up 28% YoY to nearly EUR 4bn and profit after tax up 41% YoY to EUR 95.1m in 2022. MBMH manufactures Mercedes-Benz compact vehicles (A-Class including hybrid versions, CLA Coupé and CLA Shooting Brake) as part of the group’s global production network. In April 2021, MBMH started building the plug-in hybrid version of the A-Class 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, MBMH’s activity was primarily driven by the continued ramp-up of EQB production.

MBMH is actively taking part 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 the serial production of entry-level luxury models based on the MMA’s 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, based on the MB.EA platform. This pure electric architecture is designed for Mercedes-Benz’s future medium and large cars. To support this transformation, as part of Mercedes-Benz Group’s 2022-2026 business plan, MBMH is currently investing more than EUR 1bn for the expansion, modernisation and digitalisation of the Kecskemet factory.

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 rating upgrade to A+ on guarantor Mercedes-Benz Group AG reflects the latter’s improved business risk profile on the back of structurally higher operating profitability, stemming from its strategic shift to the luxury space, coupled with a continuous streamlining of the fixed cost base. In addition, Mercedes-Benz Group’s issuer rating continues to be strongly supported by its financial risk profile, which has further improved in terms of debt protection and net cash position.

The business risk profile assessment is raised to A- from BBB+, primarily reflecting the marked improvement in operating profitability, which Scope considers sustainable. Since the Covid-19 pandemic, the company has demonstrated its ability to withstand numerous external shocks, including the Russia-Ukraine war, repeated lockdowns in China, as well as persistent semiconductor shortages, supply bottlenecks and logistical constraints. Thanks to a gradual recovery in volumes, a positive net pricing (combining substantial price increases and lower discounts), a favourable product mix and strict cost discipline, the Scope-adjusted EBITDA margin has sharply recovered from 9% in 2020 to 15.8% in 2022.

Following a very solid performance in H1 2023, Mercedes-Benz Group raised its full-year outlook and confirmed its guidance in October despite some challenges in Q3 2023, including supply constraints, disproportionate inflation-related supplier compensation costs, weak market conditions in China and intensified competition in the electric vehicle segment. Full-year 2023 Scope-adjusted EBITDA margin is expected at 15.4%, 40 bps below 2022 . For 2024, Scope expects Mercedes-Benz Group to mitigate these headwinds with an improved product mix, further cost reduction and a continued prioritisation of margins over volumes. Scope expects the Scope-adjusted EBITDA margin to decline slightly to 15% in 2024 before rising to above 15% in 2025. All in all, while Mercedes-Benz Group is not immune to macroeconomic fluctuations, Scope expects the company to remain resilient thanks to its premium/luxury strategy, which will help to reduce its cyclicality and drive structurally higher margins compared to historical levels.

Mercedes-Benz Group has maintained its overall competitive position despite its reduced size and diversification following the spin-off of Daimler Trucks. While market share has been under pressure at Mercedes-Benz Cars and Mercedes-Benz Vans in the past few years, both divisions have strengthened their brand positioning thanks to their focus on the top-end segments and the associated technological push. Scope’s strong assessment of the company’s market position remains unchanged.

Mercedes-Benz Group’s product and geographical diversification continues to support the business risk profile.

Mercedes-Benz’s improved financial risk profile, assessed at AA+, remains the key support for the rating. This mainly reflects the company’s prudent financial policy, with a sizeable net cash position in the industrial business. Thanks to a significant free operating cash flow and despite a negative trend in working capital, net industrial liquidity as reported by the company reached EUR 26.6bn at year-end 2022, rising to EUR 28.5bn at end September 2023. As a net lender to the captive finance operations, Mercedes-Benz’ industrial business no longer bears any financial debt. Scope forecasts that Mercedes-Benz Group’s industrial business will preserve a sizeable Scope-adjusted net cash position in 2023-2025, reflected in strong credit metrics. In the absence of financial debt and in the context of higher interest rates, Scope expects Mercedes-Benz Group to generate a net interest income from 2023. After some volatility over the past decade, free operating cash flow has stabilised, thanks to drastic cash preservation measures, greater capex discipline and tight working capital management. Scope expects the industrial business to generate enough free operating cash flow to cover annual dividends.

Liquidity is adequate in the absence of gross financial debt in the industrial business. In addition to sizeable unrestricted cash and cash equivalents, Mercedes-Benz Group benefits from an undrawn EUR 11bn revolving credit facility granted by an international banking consortium and converted into a sustainability-linked loan in 2022.

Supplementary rating drivers are credit neutral. Despite a shareholder-friendly approach in terms of dividend distribution, Mercedes-Benz Group’s financial policy remains fairly prudent with its share-buyback programme of up to EUR 4bn over two years (2023-2024) not perceived by Scope as a permanent tool for remunerating shareholders. Scope also assesses the risk profile of the captive finance activities (Mercedes-Benz Mobility) as adequate, with no incremental risk to the Mercedes-Benz’s creditworthiness.

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 is Stable and reflects Scope’s expectation that Mercedes-Benz Group’s operating profitability will structurally improve and show strong resilience amid continued inflationary pressures, a challenging demand environment and intensified competition in the electric vehicle space. Scope anticipates that Mercedes-Benz Group’s profitability will be supported by further efficiency gains, enhanced pricing power as well as a richer mix driven by the portfolio reshaping toward the top-end of the premium segment. Scope’s base case assumes a Scope-adjusted EBITDA margin of around 15% in 2023-2025, above industry average and well above historical levels.

The Stable 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. The company is expected to remain in a net cash position over the forecast period.

A positive rating action is remote in Scope’s view but could occur if Mercedes-Benz Group successfully shifted its portfolio toward higher-margin products leading to Scope-adjusted EBITDA margins substantially above 16% on a sustained basis while displaying strong margin and cash flow resilience in adverse market conditions.

A negative rating action could be considered if Mercedes-Benz Group’s Scope-adjusted EBITDA margin fell to around 12% on a sustained basis, as this would trigger a lower business risk assessment. This could be driven by more challenging industry business conditions or poor execution of the group’s premium and electrification strategy. A negative rating action could also be warranted if free cash flow generated in the group’s industrial business turned negative, triggered by a sustained decrease in operating profitability and /or a significant rise in investment spending.

Long-term debt rating

Scope has upgraded the instrument rating on the outstanding HUF 40bn bond (HU0000359492) from A to A+, the same level as the issuer rating. This senior unsecured bond was issued by MBMH in March 2020, with a seven-year tenor, under the Bond Funding for Growth Scheme of the Hungarian National Bank. This bond benefits from an unconditional and irrevocable guarantee provided by MBMH’s ultimate parent company Mercedes-Benz Group AG.

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, 16 October 2023; Automotive and Commercial Vehicle Manufacturers Rating Methodology, 19 December 2023), 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    NO
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 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 and/or Outlook 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: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 March 2020. The Credit Ratings/Outlook were last updated on 23 December 2022.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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