DBRS Morningstar Upgrades Daimler AG to A (low), Trend Remains StableAutos & Auto Suppliers
DBRS Limited (DBRS Morningstar) upgraded the Issuer and Senior Debt ratings of Daimler AG (Daimler or the Company) to A (low) from BBB (high). Concurrently, DBRS Morningstar upgraded the long- and short-term ratings of rated subsidiaries, Daimler Canada Finance Inc. and Daimler Finance North America LLC, to A (low) from BBB (high) and to R-1 (low) from R-2 (high), respectively. The ratings upgrade reflects the Company’s moderately improved business risk assessment (BRA) as a function of Daimler’s forthcoming spin-off (the Spin-Off) of a majority stake in its commercial vehicles business, Daimler Trucks (DT). Moreover, the Company’s financial risk assessment (FRA) has also strengthened in line with Daimler’s favourable recent earnings performance, notwithstanding material industry challenges that include the global progression of the Coronavirus Disease (COVID-19) and, more recently, the worldwide semiconductor shortage. The trend on the ratings is Stable as DBRS Morningstar notes that Daimler’s FRA, recognising the solid earnings performance amid its ongoing conservative financial policy, provides moderate cushion in the context of the current ratings.
The Company’s strong recent profitability reflects favourable demand levels that have persisted from 2020 through 2021 thus far. Moreover, amid supply and production constraints that initially stemmed from last year’s escalation of the coronavirus pandemic and persisted this year because of the semiconductor shortage, Daimler’s margins have benefitted from meaningful resulting gains in both product mix and pricing. Additionally, the Company’s free cash flow generation over this period has been favourable, relative to most original equipment manufacturers (OEMs), and in line with the Company’s tight working capital management and implemented cost reductions (some of which were initially temporary responses to the pandemic but have since been maintained).
Regarding the Spin-Off, DBRS Morningstar deems the transaction to be positive for the BRA of Daimler (subsequently expected to be renamed Mercedes-Benz Group AG in early 2022). While DT’s businesses ostensibly provided moderate diversification benefits to the Company, this is deemed to be more than offset by the stronger margins and reduced earnings volatility of the residual automotive business. Additionally, the resulting simplified corporate structure of the remaining Company should help enable Daimler to react more rapidly to future industry developments and changing market conditions. DBRS Morningstar notes that the automotive sector faces meaningful cost headwinds, currently in the form of increasing raw material prices, and, over the medium to long term, higher product development costs associated with the progressive electrification of the industry given tightening emissions legislation across most global jurisdictions. However, in addition to its previously cited efficiency initiatives, Daimler, as a globally-leading premium automotive OEM, appears well positioned to participate in this industry transition for many reasons. Firstly, consumers of premium automotive vehicles are typically more eager to embrace the latest in automotive technology. Secondly, such consumers are generally wealthier (compared with purchasers of mainstream vehicles) and are therefore likely more able and willing to absorb the currently higher costs and pricing associated with electric vehicles (EVs). To this end, Daimler updated its EV strategy earlier this year with the Company outlining high level targets. These include an accelerated ramping down of vehicles equipped with internal combustion engines, with the Company introducing four new EV models this year. In the longer term, the Company is targeting to have an EV version available for every model by 2025; Daimler also being prepared to go all electric (i.e., automotive sales effectively consisting exclusively of EVs) by the end of this decade.
Consistent with the Stable trend, the ratings are expected to remain constant over the near to medium term; DBRS Morningstar notes that Daimler’s FRA provides some cushion at the existing ratings level, rendering a downgrade unlikely. Conversely, an upgrade is not anticipated over a similar time horizon, in line with the aforementioned cost headwinds facing the industry.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in euros unless otherwise noted.
The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021; https://www.dbrsmorningstar.com/research/375001), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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 United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021) was the primary rating methodology applied in determining the rating of parent company Daimler AG. Subsequently, DBRS Morningstar Criteria: Guarantees and other Forms of Support (May 31, 2021) was applied in determining 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), results in a flow through of Daimler AG’s rating to Daimler Canada Finance Inc. and Daimler Finance North America LLC. Finally, DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021) was applied 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 Criteria.
The last rating action took place on August 11, 2020, when DBRS Morningstar downgraded the long-term ratings of Daimler AG to BBB (high) with a Stable trend.
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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
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 14, 2021)
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021)
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021)
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- Rating Companies in the Automotive Manufacturing and Supplier Industries (Archived) / October 14, 2021
- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (Archived) / May 31, 2021
- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (Archived) / March 9, 2021