(The following statement was released by the rating agency) Fitch Ratings-Barcelona-April 14: Fitch Ratings has downgraded Daimler AG (DE:DAIGn)'s Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Outlook is Stable. The downgrade reflects the deterioration of Daimler's financial profile and Fitch's projections that a recovery will be slow. Fitch expects a sustained weakened economic environment and its effect on new car and heavy truck sales in the next one-to-two years to exacerbate the underlying fundamental challenges facing the group. We expect Daimler's free cash flow (FCF) to be constrained by significant investments into sustainable and alternative mobility and potential penalties related to the group's fuel emissions. The Stable Outlook reflects the headroom in the rating following today's rating action. Fitch's base case includes a major global economic downturn in 2020 that will significantly affect new vehicle sales globally. Nonetheless, we expect a rebound in sales in 2H20 and into 2021 albeit to a lower level than previously assumed. Weaker-than-expected new vehicle sales and earnings in the coming months could put renewed pressure on the ratings. Key Rating Drivers Drop in Car Profitability: The automotive division´s (MBC) operating margin, excluding equity-investment income, fell to below 2.5% in 2019 (5% excluding non-recurring items), from 6.6% in 2018 and 8.5% in 2017, and we expect a further deterioration in 2020. Fundamental challenges, particularly increasing investments in new technologies, including autonomous and electric vehicles (EVs), will be compounded by the effects of the pandemic on new car sales in the coming 12-18 months. However, Daimler's new management has refocused its strategy towards greater cost-cutting and efficiencies and we expect these initiatives to boost profitability from 2021 onwards. Weak, Volatile FCF: Sustained high investments, combined with generous dividend payment, have kept FCF margin in negative territory since 2017 (around -1.5%) and we expect further cash absorption in 2020. Our current base case includes a negative 0.5%-1% FCF margin but significant uncertainty around the effects of the pandemic on new vehicle sales in the next one-to-two years makes it difficult to predict the magnitude of FCF absorption. The group is taking measures to reduce and postpone some investments but we believe it will not be enough to cover the fall in underlying funds from operations (FFO) and the required needs to develop critical vehicles such as EVs. Premium Advantage Fading: The drop in MBC's profitability and cash generation illustrates how premium manufacturers' competitive and financial advantage over mass-market carmakers has waned in recent years. Premium manufacturers are investing heavily in new technologies, in particular in powertrain electrification and alternative and autonomous mobility, to meet stringent emission targets and remain at the forefront of sector trends. Nonetheless, we believe that Daimler's financial efforts towards sustainable and future mobility will place the group in a more favourable competitive position in the medium- to long-term. Significant Fuel Emissions Risk: We believe that reaching 2020/2021 EU CO2 emission targets in Europe will be a critical challenge for Daimler. The accelerating decline in diesel penetration in Europe and still limited EV penetration could lead Daimler to miss targets and cost it a few hundred million euros. In addition, a rapid swing to other powertrains would be negative for used car prices and, in turn, residual values to which the group is exposed. Increasing EV sales could partially lower the risk but weigh on profitability. Regulation Potentially on Hold: The evolution of the product mix following the pandemic is difficult to forecast but the immediate sales recovery could be focused on smaller, more fuel-efficient models, penalising Daimler's earnings but supporting its average CO2 emissions. However, regulatory response is hard to anticipate at this point. European regulators have so far taken a hard stance towards lowering fuel emissions but exceptional circumstances may warrant special derogations for carmakers, depending on the duration and magnitude of the crisis. Potential Additional Fines: We see a major risk of further penalties and recall costs from regulatory investigations into whether Daimler' vehicles do not, or did not, meet all legal requirements, in particular related to the installation of impermissible emission control systems. Daimler already paid a EUR870 million fine in 2019 and faces several lawsuits in Europe and the US. The group increased its provisions for liability-and-litigation risks and regulatory proceedings to EUR4.9 billion at end-2019 from EUR2.1 billion at end-2018. Geopolitical Risks Mounting: MBC's significant share of sales in the UK (8%), China (nearly 30%) and the US (14%) makes the group heavily exposed to a potential hard Brexit and renewed commercial tensions between the US, China and Europe. In particular, Daimler is at risk of changes, or indications of potential changes, in global tariffs because of its material share of imports in total Chinese sales, including nearly 10% coming from the US. Residual Value Risk: The decline in diesel sales leaves Daimler exposed to falling residual values. This, combined with a continuous increase in financial services activity, outperforming growth in the underlying industrial business, leaves Daimler exposed to further capital contributions to its financial services (FS) business. This would ultimately increase Daimler's industrial leverage as Fitch adjusts industrial and FS debt to maintain a minimum debt-to-equity ratio at the FS business. Leading, Diversified Business: Daimler has wide geographical and business diversification. It has leading positions in the premium passenger-car segment with its MBC division. Daimler Trucks (DT) is the world's largest heavy-truck manufacturer. It is number one in Europe and North America and ranks second or third in several other countries/regions, including Brazil and Japan. The group also holds leading positions in the global van and bus markets. Effect from ESG Factors: Daimler has an ESG Relevance Score of 4 for GHG Emissions Air Quality and Management Strategy. The group is facing stringent emission regulation, notably in Europe, which is its main market, and regulatory investigations. ESG '4' for Emissions: Daimler has an ESG Relevance Score of 4 for GHG Emissions Air Quality as it is facing stringent emission regulation, notably in Europe. Investments in lower emission are a key driver of the group's strategy and cash generation and this is therefore relevant to the rating in conjunction with other factors. ESG '4' for Management: The ESG score of '4' for Management Strategy reflects financial penalties and fines related to Daimler vehicles' emissions. Daimler is lagging its close competitors in terms of CO2 requirements and is facing heavy financial penalties for not meeting its regulatory targets. The group has also paid fines as a result of regulatory investigations ruling that its vehicles did not meet all legal requirements and it is facing several lawsuits in Europe and the US. Derivation Summary Daimler's business and financial profiles have deteriorated in the past couple of years and now compare unfavorably with that of peers in the 'A' category. The group has a weaker competitive position than large manufacturers, such as Toyota Motor Corporation (A+/Stable) and Volkswagen (DE:VOWG_p) AG (BBB+/Stable) but this is partly offset by its positioning in the premium segment. Daimler's image remains strong and the group's brand value extremely high. Compared with manufacturers focused on the automotive business, Daimler's heavy trucks and bus segments provide diversification, despite the higher cyclicality of the truck business sector and still-limited synergies between all the divisions. Daimler's financial structure has deteriorated since 2017 and is more in line with that of the 'BBB' category. We expect net leverage to be around breakeven in 2020, compared with a historical negative position. However, we expect an improvement thereafter and Daimler's leverage to return to levels in line with that of Volkswagen, Toyota and Honda Motor Co., Ltd (A/Stable). Among the highest-rated manufacturers, Daimler's net cash generation has been most volatile in the past decade and is weak for the rating category. Likewise, automotive operations' profitability has been lower and more volatile than that of close peers BMW and Volkswagen's Audi. The truck division's profitability compares adequately with that of other large global truck makers including AB Volvo (BBB+/Positive). Key Assumptions - Low double-digit sales decline for industrial operations in 2020, driven by global dealerships shutdowns. Gradual recovery from 2021 in mid-single digits, reflecting a mild improvement of macroeconomic conditions. - Significant operating margin decline in 2020, excluding exceptional items, reflecting high operating leverage. Thereafter we expect margins from industrial operations to recover gradually to more than 5% by 2022, as sales increase, the product mix improves and effects of cost-cutting measures kick in. - Exceptional cash outflows of EUR0.5 billion and EUR2 billion in 2020 and 2021, respectively, to cover settlement of legal and government proceedings and some restructuring costs. - Capex declining to below 7% of revenue in 2021, on more selective investment policy and projects prioritisation. - Working capital release in 2020 and 2021. - Dividend cut in 2021 but recovering to more than EUR1 billion in 2022 and EUR2 billion in 2022. - No share buy-backs or large acquisitions. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action/Upgrade (although an upgrade is unlikely until the global environment has normalised): - FCF margin recovering to more than 1.5% (2019: -1.4%, 2020E: -0.8%). - Group operating margins sustainably above 6% (2019: 2.2%, 2020E: 2.3%). Developments That May, Individually or Collectively, Lead to Negative Rating Action/Downgrade: - Increasing risk of deteriorating liquidity. - Group operating margins remaining below 4%. - FCF margin remaining below 0.5%. - Gross leverage above 2.0x (2019: 1.2x, 2020E: 2.1x) and net leverage above 1.0x (2019: -0.1x, 2020E: -0.1x) Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Healthy Liquidity: Daimler has a healthy liquidity position, including gross reported cash and marketable securities from the industrial business of EUR23.7 billion at end-2019, excluding Fitch's adjustment for operational and restricted cash. Daimler's liquidity profile is also supported by a fully undrawn EUR11billion credit facility due in 2025 and a EUR12 billion loan facility agreement signed in early April 2020. Daimler has a record of maintaining a net cash position through the cycle. Its debt structure and funding mix is well-diversified and consists of bonds, bank loans, securitisation, commercial paper and account deposits. Daimler also demonstrated its access to the eurobond market during pandemic with the successful issue of a EUR1.5 billion five-year bond in early April 2020. Limited Short-term Working Capital Outflow: We do not expect immediate liquidity risk from working capital development as a result of production stoppages and falling sales. The group has a broadly neutral trade payables and receivables net position, significantly limiting the risk of cash hemorrhage when production stops, contrary to other auto manufacturers that continue to honour their trade payables for several weeks while not cashing in their trade receivables. We believe that total available liquidity provides the group with reasonable headroom to face a sales standstill and production stoppage for at least two-to-three months without necessitating any external support. Summary of Financial Adjustments Fitch adjusts leverage metrics for financial services (FS) operations. Fitch calculated a target debt-to-equity ratio of 6x for Daimler's FS operations, below the actual ratio of 10.5x at end-2019. Fitch assumed that Daimler makes a EUR9.1 billion equity injection into its FS operations, to bring its debt-to-equity ratio down to 6x. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Daimler has an ESG Relevance Score of 4 for GHG Emissions Air Quality, and for Management Strategy. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Daimler Finance North America LLC ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F1 ----guaranteed; Short Term Rating; Affirmed; F1 Mercedes-Benz Finance Co., Ltd. ----guaranteed; Long Term Rating; Downgrade; BBB+ Daimler International Finance BV ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F1 Daimler Mexico, S.A. de C.V. ----guaranteed; Long Term Rating; Downgrade; BBB+ ----guaranteed; Short Term Rating; Affirmed; F1 Daimler AG; Long Term Issuer Default Rating; Downgrade; BBB+; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----guaranteed; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F1 ----guaranteed; Short Term Rating; Affirmed; F1 Mercedes-Benz Australia/Pacific Pty. Ltd. ----guaranteed; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----guaranteed; Short Term Rating; Affirmed; F1 Mercedes-Benz South Africa Ltd ----guaranteed; Long Term Rating; Downgrade; BBB+ ----guaranteed; Short Term Rating; Affirmed; F1 Daimler Canada Finance Inc. ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F1 Mercedes-Benz Finansman Turk Anonim Sirketi ----senior unsecured; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F1 Mercedes-Benz Japan Co.Ltd. ----guaranteed; Long Term Rating; Downgrade; BBB+ ----senior unsecured; Long Term Rating; Downgrade; BBB+ Contacts: Primary Rating Analyst Emmanuel Bulle, Senior Director +34 93 323 8411 Fitch Ratings Espana. S.A.U. Av. Diagonal 601 Barcelona 08028 Secondary Rating Analyst Michele Giagheddu, Associate Director +49 69 768076 156 Committee Chairperson Paul Lund, Senior Director +44 20 3530 1244
Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10111917 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10090792 Short-Term Ratings Criteria (pub. 06 Mar 2020) https://www.fitchratings.com/site/re/10112342 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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