DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating and Senior Debt rating of Daimler AG (Daimler or the Company) to BBB (high) from “A.” Concurrently, DBRS Morningstar downgraded the ratings of the Company’s rated subsidiaries, Daimler Canada Finance Inc. and Daimler Finance North America LLC, to BBB (high) from “A” for their long-term ratings and to R-2 (high) from R-1 (low) for their short-term ratings. The ratings downgrade reflects structural headwinds (significantly consisting of Daimler’s electrification efforts and ongoing investments into self-driving technologies and associated services) facing the Company’s core Mercedes-Benz Cars (MBC) segment that have been considerably exacerbated by the global escalation of the Coronavirus Disease (COVID-19). As such, pursuant to the moderate scenario outlined in DBRS Morningstar’s commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” (initially dated April 22, 2020, and subsequently updated on July 22, 2020), DBRS Morningstar estimates that Daimler’s financial risk assessment (FRA) and associated credit metrics will decline to levels meaningfully weaker relative to the Company’s former ratings. The trend on all ratings is Stable. DBRS Morningstar notes that Daimler’s solid business risk assessment underpins the revised ratings. As such, the Company’s credit metrics would have to weaken considerably further from the current lacklustre levels to warrant a further downgrade, which DBRS Morningstar does not anticipate. With these rating actions, Daimler’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.
DBRS Morningstar notes that prior to the coronavirus outbreak, the Company’s FRA was trending downward given the above-cited headwinds amid moderating volumes and softer pricing; such challenges led DBRS Morningstar to change the trend for the long-term ratings to Negative from Stable in November 2019. As with other automotive original equipment manufacturers, the coronavirus pandemic materially affected the Company’s operations globally, initially in China in January 2020 and subsequently across Europe and North America (as well as several other smaller jurisdictions) in March 2020. In line with the trajectory of the pandemic, Daimler’s H1 2020 financial results were correspondingly weaker compared with the similar prior-year period as the Company’s industrial operations reported revenues of EUR 53.9 billion (compared with revenues of EUR 68.3 billion in H1 2019) and an EBIT-adjusted loss of EUR 0.4 billion. Currently, DBRS Morningstar anticipates Daimler’s 2020 annual industrial sales to decline by more than 20% compared with 2019 levels, with EBIT adjusted also significantly affected (albeit projected to remain at materially positive levels), thereby resulting in meaningfully weaker earnings-based credit metrics.
Although DBRS Morningstar projects Daimler’s cash flow generation to decrease in line with softer earnings, this is estimated to be considerably offset by positive working capital that reflects the Company’s rapid stoppage of production in response to coronavirus. Moreover, sizable free cash flow generation in H1 2020 from Daimler’s Mobility business (in line with the contraction of the segment’s receivables portfolio) flowed through to the industrial operations. These two developments meaningfully alleviated increases in the Company’s industrial indebtedness as a function of coronavirus. Moreover, Daimler retained its strong access to the capital and bank markets notwithstanding coronavirus as demonstrated by ongoing bond issuances through H1 2020, with the Company in April also obtaining an additional syndicated credit facility of EUR 9.9 billion (adjusted from an initial amount of EUR 12 billion following capital market transactions closed in Q2 2020). This loan facility supplements Daimler’s EUR 11 billion syndicated revolving credit facility (obtained in July 2018), with both facilities remaining undrawn as of June 30, 2020. As such, DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.
Notwithstanding the substantially negative effects of coronavirus on global automotive sales and production, DBRS Morningstar notes that the ensuing sales recovery across major jurisdictions has thus far moderately exceeded its expectations. Significantly, industry sales in China—Daimler’s most important single automotive market—reverted to year-over-year growth as of April 2020 following an extended decline of almost two years. DBRS Morningstar acknowledges that sizable headwinds associated with coronavirus persist, notably in the U.S. where the pandemic shows no signs of abating across several states. DBRS Morningstar notes, however, that the Company’s exposure to the U.S. is well manageable. Moreover, as anticipated, sales of premium vehicles (the predominant focus of MBC) have thus far proven relatively resilient to the adverse effects of the pandemic.
Consistent with the Stable trend, DBRS Morningstar expects the ratings to remain constant over the near term with existing industry headwinds associated with the coronavirus effectively precluding an upgrade. Conversely, should the coronavirus pandemic develop such that it readily approximates the adverse scenario (as outlined in the above-cited commentary) and weakens Daimler’s credit metrics materially further, negative rating pressures would result; however, DBRS Morningstar does not currently anticipate this situation.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
All figures are in euros unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2019), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at firstname.lastname@example.org.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS Morningstar applied “Rating Companies in the Automotive Manufacturing and Supplier Industries” (October 28, 2019) as the primary rating methodology to determine the rating of parent company, Daimler AG. Subsequently, DBRS Morningstar applied “DBRS Morningstar Criteria: Guarantees and Other Forms of Support” (January 22, 2020) to determine the ratings of Daimler Canada Finance Inc. and Daimler Finance North America LLC, both of which benefit from a Guarantee of Daimler AG. The Guarantee, in combination with DBRS Morningstar’s assessment of additional implicit support considerations, including (but not limited to) business, reputational, and financial factors that are deemed likely to motivate a parent or affiliated company to support its subsidiary issuer, result in a flow through of Daimler AG’s rating to Daimler Canada Finance Inc. and Daimler Finance North America LLC. DBRS Morningstar used “DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 10, 2020) to ensure that the provided liquidity in support of Daimler Canada Finance Inc.’s and Daimler Finance North America LLC’s Commercial Paper ratings was consistent with DBRS Morningstar’s criteria. Finally, DBRS Morningstar applied “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Relationships” (November 25, 2019) to assess the corporate structure of the Daimler group of companies.
The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of Daimler AG, Daimler Canada Finance Inc., and Daimler Finance North America LLC Under Review with Negative Implications.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.
Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Industrials & Natural Resources Initial Rating Dates:
Daimler AG – August 29, 2000
Daimler Canada Finance Inc. – May 19, 1995
Daimler Finance North America LLC – November 14, 2016
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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019)
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020)
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020)
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019)