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Rating action

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

The ratings are aligned with those of the parent company Mercedes-Benz Group AG for which Scope has affirmed an A+ issuer rating and changed the Outlook to Negative. The affirmation is driven by a very strong financial risk profile, with a net cash position in the industrial business, which we expect to be maintained in 2024-25. The affirmation is further driven by a good business risk profile, supported by the brand's recognition, active product dynamic and Scope’s expectation that profitability, as measured by the Scope-adjusted EBITDA margin*, will recover after 2025. The Negative Outlook reflects the increasingly challenging business environment in 2024 and the dim outlook for 2025 including threats of US-led rise in tariffs.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

MBMH is a wholly-owned subsidiary of Mercedes-Benz Group AG and one of the largest industrial companies in Hungary. At the Kecskemet plant, MBMH manufactures compact cars (A-Class including hybrid versions, CLA Coupé and CLA Shooting Brake), the all-electric EQB and the Mercedes-AMG Performance models as part of the group's global production network. In 2023, MBMH produced over 174,000 vehicles (up 14% YoY) at its Kecskemet plant. The company achieved a strong financial performance with revenue up 28% YoY to nearly EUR 5.1bn and an EBITDA of EUR 226.9m in 2023.

MBMH is actively taking part in Mercedes-Benz Group’s electric offensive. The site's product portfolio will be expanded in the coming years with the serial production of entry-level luxury models based on the MMA platform (Mercedes-Benz Modular Architecture) and the addition of all-electric core luxury models based on the MB.EA platform (Mercedes-Benz Electric Architecture). 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 rating specifically reflects Mercedes-Benz Group’s unconditional and irrevocable guarantee to debtholders of MBMH’s outstanding HUF 40bn bond.

Business risk profile of guarantor Mercedes-Benz Group AG: BBB+ (revised from A-). The revised business profile reflects increased pressure in the premium segment, causing an erosion of market share, as well as Scope's downward revision of its expectations for Mercedes-Benz’s profitability in 2024-25.

The automotive market has been in transition for several years: electric cars are driving growth, especially in China, the world's largest car market; new competitors are entering the market for electric cars; and pressure is increasing even in the premium segment. MB Cars' global market share came under pressure in 2023, following a recovery in 2022, due to weak volume development in China. Scope expects the downward trend to continue beyond 2023. A stabilisation or even reversal of this trend might occur after 2026, when the launch of a large number of new products will push up sales figures.

Despite pressure on market share, Scope continues to view Mercedes-Benz's market position as robust and supportive for the rating. It is bolstered by the brand's recognition, which remains one of the strongest and most valuable premium automotive brands in the world.

MB Cars will further reshape its product portfolio through active product dynamics. Scope expects the share of electric cars to continue to grow in the medium term, supported by new product launches, though at a slower pace than assumed in 2023. In summer 2024, Mercedes-Benz announced that it intends to maintain a mix of combustion engines, hybrids and electric cars in the long term, contrary to its previous 'all-electric' strategy. Scope sees this as a result of sluggish demand for electric cars, especially in Europe, and fierce competition, particularly from Chinese electric car manufacturers. Recently, MB Cars has started to streamline the Entry portfolio from seven to four bodystyles in order to reduce complexity and focus on the largest profit sources, which will lead to an overall decrease in the segment's share of sales. MB Vans also plans to accelerate the electrification of its portfolio after the launch of the all-new, electric-only architecture VAN.EA.

Scope continues to view Mercedes-Benz Group’s diversification, in particular its broad geographic reach and wide range of premium vehicles, including passenger cars and vans, as supportive for its business risk profile. Geographical reach with a global manufacturing presence is becoming increasingly important in the face of potential tariff wars. Local production currently covers more than 80% of MB Cars’ sales in China and around 35% in the USA. Thus, around 9% of total unit sales would be affected by potential US import tariffs. Diversification also benefits from captive finance operations, adding a source of operating profits to the industrial business.

The difficult business environment in 2024, with increasing margin pressure at MB Cars in 2024, and the dim outlook for 2025 have led Scope to revise its expectations for Mercedes-Benz’s revenue and profitability in 2024-25 downwards. Scope expects industrial revenue of around EUR 119.5bn in 2024 (down 5.8% YoY) and EBITDA of about EUR 14.9bn in 2024, down significantly from EUR 21.1bn in 2023. The outlook for 2025 is rather uncertain as European OEMs face a looming tariff war on top of the cyclical downturn. An introduction of tariffs would impact sales and profitability, because Mercedes-Benz will not be able to adjust its production capacity in the short term. In its base case, Scope assumes slightly lower industrial revenue and a further decline in EBITDA in 2025. In addition to lower expected revenues, the decline also reflects the assumed lower profitability in 2025 due to several headwinds, such as higher investments in future technologies, the impact of CO2 costs, the expected tariff escalation on US imports from Europe and a lower overall contribution from BBAC. In order to counteract at least some of the negative effects, Mercedes-Benz has recently launched a cost-cutting programme. The programme is expected to lead to savings in fixed and variable costs in the single-digit billion range in the years 2025-26. Supported by this programme, Scope expects a slight recovery in profitability in 2026.

Financial risk profile of guarantor Mercedes-Benz Group AG: AA+ (unchanged). Mercedes-Benz’s unchanged very strong financial risk profile remains the key support for the issuer rating. This mainly reflects the group’s conservative financial policy, as evidenced by the continued robust net cash position of Mercedes-Benz’s industrial business (cars and vans).

Scope expects lower earnings and a further increase in capex to weigh on Scope-adjusted free operating cash flow (FOCF) and projects FOCF in 2024-25 to be significantly lower than in 2023. Scope expects industrial capex to increase in both 2024 and 2025, driven in particular by higher capitalised R&D due to continued investment in new technologies, innovative powertrains, battery capacities and software capabilities. Scope projects a significant reduction in industrial capex from 2026 onwards, driven by reduced complexity and optimised production footprint.

Shareholder remuneration will increase following the introduction of a share buy-back policy in February 2024, but Scope expects this to be covered by cash flow, as both dividend payments and share buybacks are linked to industrial free cash flow.

Like most automotive manufacturers, the Mercedes-Benz Group has a very high level of gross financial debt, totalling EUR 108.6bn at year-end 2023. The vast majority of this is used to refinance the leasing and sales financing business of captive finance activities (Mercedes-Benz Mobility). Scope’s analysis of the group’s financial risk profile is based on the financials of Mercedes-Benz Group’s industrial activities. To that end, the agency separates material line items from the consolidated accounts that relate to Mercedes-Benz Mobility, notably its financial debt. The industrial business's share of financial debt turned negative in 2022 and remained negative in 2023, meaning that the industrial business became a net lender to the financial services business. Adjusted for pensions and trapped cash, Scope calculates a net cash position of around EUR 33.5bn at year-end 2023. The agency expects Mercedes-Benz to maintain a negative gross debt position in the industrial business in 2024 and 2025 and an overall net cash position.

The net cash position of the industrial business ultimately results in strong leverage ratios, with Scope-adjusted debt/EBITDA, Scope-adjusted funds from operations/debt and Scope-adjusted FOCF/debt all being negative. The rating agency expects Scope-adjusted credit ratios to continue to reflect this net cash status in 2024 and 2025.

Scope assesses the risk profile of the captive finance activities (Mercedes-Benz Mobility) as adequate, with no incremental risk to Mercedes-Benz’s creditworthiness.

Liquidity of guarantor Mercedes-Benz Group AG: adequate. Liquidity is adequate, supported by the absence of gross financial debt in the industrial business since 2022, which Scope expects to persist through 2024-26. In addition, Scope notes the sizeable unrestricted cash on the balance sheet and the available undrawn EUR 11bn revolving credit facility, successfully renewed in June 2024 and now available until at least 2029, with two one-year extensions. Furthermore, Mercedes-Benz could reduce its 30% stake in Daimler Truck or securitise receivables from the financial services business (ABS transactions) in order to raise cash.

There are no financial covenants, asset pledges or credit support agreements in line with Mercedes-Benz Group’s funding strategy.

Supplementary rating drivers: credit-neutral. The rating does not incorporate any adjustments related to financial policy, peer group considerations, parent support or governance and structure.

Scope remains neutral on Mercedes-Benz's financial policy, despite the recent shift towards more shareholder-friendly capital allocation with the adoption of share buybacks as a permanent tool for shareholder remuneration in addition to dividends. Both the dividend payout and share buybacks are linked to industrial free cash flow, which prevents debt-financed shareholder remuneration. For this reason, Scope continues to view the company's capital allocation approach as balanced between the interests of shareholders and creditors.

Outlook and rating sensitivities: same as those of guarantor Mercedes-Benz Group AG

The revised Outlook to Negative from Stable reflects the increasingly challenging business climate, which will squeeze sales and profitability in 2024 and beyond. It also reflects the prospect of a US-led rise in tariffs, which could further raise pressure on sales and profitability once implemented. Overall, Scope’s base case assumes lower revenues in 2024 and 2025 and an EBITDA margin of well below 12%. The revised Outlook also takes into account the recent loss of market share which, if sustained, would put further pressure on the business risk profile. The Outlook includes Scope’s view that Mercedes-Benz will maintain a net cash position.

The upside scenarios for the rating and Outlook are (collectively):

1. EBITDA margin to improve significantly above 10%, e.g. due to an improved business climate or the non-introduction of tariffs.
    
2. A reversal of the downtrend in market shares e.g. through the launch of new products.

The downside scenarios for the rating and Outlook are (individually or collectively):

1. Inability to improve the EBITDA margin significantly above 10%.
    
2. Sustained erosion of market position leading to a loss of market shares.
    
3. Inability to maintain a net cash position (deemed remote).

Debt rating

Scope has affirmed the A+ instrument rating on the outstanding HUF 40bn bond (HU0000359492), 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.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action. Like all car manufacturers, Mercedes-Benz Group faces rising pressure from tightening environmental regulations and the race to carbon neutrality. 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 (by training, reskilling and upskilling existing personnel as well as hiring new talent with more specific profiles).

Mercedes-Benz faces a regulatory compliance risk in 2025, as the European Union’s Green Deal target comes into effect with emissions limited at 93.6 grams of CO2 per kilometre as an average for car manufacturers. With a light vehicle test procedure (WLTP) value of 109g/km in 2023, down from the comparable value of 115g/km in 2022, Mercedes-Benz Cars successfully met the European CO2 emissions target of 115g/km. The CO2 emissions target of 115g/km also applies to 2024, and despite the decline in e-car sales in 2024, Scope considers it likely that Mercedes-Benz will again meet the European regulatory targets. From 2025, the EU has set an average CO2 emission target of 93.6 g/km, which seems challenging at this stage given the development of Mercedes-Benz e-car sales. Scope assumes that Mercedes-Benz could buy carbon credits in 2025 to avoid fines.

Governance is credit-neutral as no specific issues have been identified. The shareholder structure has some long-term core shareholders, notably Kuwait's Sovereign Savings Funds since 1974, Chinese investor Li Shufu via Tenaciou3 Prospect Investment Limited since 2018, and Mercedes-Benz's Chinese partner BAIC Group since 2019. There are no dominant shareholders and no German government presence (unlike VW, which has the state of Lower Saxony).

All rating actions and rated entities

Mercedes-Benz Manufacturing Hungary Kft.
Issuer rating: A+/Negative, Outlook change

Senior unsecured guaranteed bond rating (HU0000359492): A+, affirmation

*All credit metrics refer to Scope-adjusted figures.

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 2024), 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 these 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: Gennadij Kremer, Director
Person responsible for approval of the Credit Ratings: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 March 2020. The Credit Ratings/Outlook were last updated on 22 December 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Innovation Lab 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.