DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Debt rating of Mercedes-Benz Group AG (Mercedes or the Company) at A (low). DBRS Morningstar also confirmed the Medium-Term Notes and Commercial Paper (CP) ratings of Mercedes-Benz Finance Canada Inc. at A (low) and R-1 (low), respectively, as well as the Senior Debt and CP ratings of Mercedes-Benz Finance North America LLC at A (low) and R-1 (low), respectively. All trends are Stable. The rating confirmations incorporate the Company’s solid business risk assessment as a globally leading premium automotive original equipment manufacturer (OEM). Moreover, Mercedes’ financial risk assessment (FRA) remains strong, having benefitted from favourable earnings performance and meaningful reductions in industrial indebtedness. Despite significant industry headwinds in the form of supply base challenges, Coronavirus Disease (COVID-19) pandemic-related lockdowns affecting certain jurisdictions, and weakening consumer sentiment, DBRS Morningstar expects Mercedes’ FRA to persist at levels providing cushion in the context of the current ratings.
The Company’s 2021 operating performance improved considerably year over year, with the industrial operations attaining a solid annual operating margin of 9.5% (as calculated by DBRS Morningstar). Positive factors included a firmer product mix and strongly improved net pricing. These were partly offset by curtailed volumes (in line with the global semiconductor shortage); increased raw material/commodity costs; and higher selling, general, and administrative expenses amid ongoing investments in future technologies and vehicles. Through the first nine months of 2022, the operating margin of industrial operations improved further to 11.6%.
Going forward, DBRS Morningstar acknowledges that consumer sentiment may weaken considerably over the near term as a result of inflationary pressures, rising interest rates, and geopolitical uncertainty (notably in Mercedes’ core European market). However, DBRS Morningstar also notes that, as a result of protracted interruptions in automotive production (initially because of the coronavirus pandemic and subsequently because of the semiconductor shortage), there remains considerable pent-up demand that is expected to persist at least until early 2023. Moreover, the operating performance of premium automotive OEMs has historically proven to be considerably more resilient to cyclical downturns compared with mainstream auto manufacturers. To this end, DBRS Morningstar notes that Mercedes is progressively refining its product portfolio to further emphasize its top-end vehicles, which in terms of sales share are targeted to grow by 60% by 2026 (relative to a 2019 base). Finally, to help offset any potential gas rationing that could affect its European assembly plants, Mercedes is stockpiling certain components produced using natural gas to moderate any associated effects on vehicle production.
Consistent with the Stable trends, DBRS Morningstar expects the ratings to remain constant, with Mercedes solidly placed in the current rating category. Though unlikely given the current cushion afforded by the Company’s FRA, significantly weaker earnings amid ongoing high investments tied to the progressive electrification of Mercedes’ automotive fleet—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications. Conversely, the Company’s ongoing strong operating performance through market conditions that may meaningfully deteriorate over the next year could positively affect the ratings.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Mercedes is subject to a wide range of environmental compliance requirements relating to carbon dioxide (CO2), fuel efficiency, emissions control, and other factors. In the event that the Company would not comply with applicable regulations, significant penalties and reputational harm could result. Correspondingly, the Company announced its Ambition 2039 initiative, which targets CO2-neutrality of Mercedes vehicles across their lifecycles. This includes climate neutrality among the Company’s supply base, CO2-neutral production across its global production facilities, as well as the CO2-neutrality of Mercedes vehicles during the utilization phase. The expected costs of compliance with global environmental regulations and in pursuit of Mercedes’ Ambition 2039 initiative are sizable.
Although the environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Mercedes.
There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All figures are in euros unless otherwise noted.
The principal methodologies are Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), and DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022; https://www.dbrsmorningstar.com/research/393065), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 email@example.com.
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:
The last rating action on this transaction took place on November 18, 2021, when DBRS Morningstar upgraded Daimler AG (subsequently named Mercedes-Benz Group AG) to A (low) with a Stable trend.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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, Credit Ratings, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Senior Vice President, Credit Ratings, Diversified Industries
Initial Rating Dates: Mercedes-Benz Group AG – August 29, 2000; Mercedes-Benz Finance Canada Inc. – May 19, 1995; Mercedes-Benz Finance North America LLC – November 14, 2016
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-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022)
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022)
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022)