June 5, 2012 / 2:26 PM / in 5 years

TEXT-Fitch revises Volkswagen Group outlook to positive

 (The following statement was released by the rating agency)	
 June 5 - Fitch Ratings has affirmed Daimler AG's and Volkswagen Group's
Long-term Issuer Default Ratings (IDR) and senior unsecured notes at 'A-' and
Short-term IDR at 'F2'. Fitch has also revised Volkswagen's Outlook to Positive
from Stable. The Outlook on Daimler's Long-term IDRs is Stable. A full list of
rating actions is at the end of this release.	
	
"Both Daimler and Volkswagen are comfortably positioned in their current 	
ratings, thanks to solid credit metrics for the rating category, strong 	
diversification, leading positions in their respective markets and robust growth	
prospects", says Emmanuel Bulle, Senior Director in Fitch's European Corporates 	
team. "In addition, Volkswagen's substantial cash pile and free cash flow 	
generation provide the group with significant headroom in its ratings and should	
enable it to absorb further expected investment without impairing key credit 	
metrics."	
	
Fitch considers Volkswagen's business profile to be at the top end of the 	
sector. Volkswagen Group's ratings are supported by an unparalleled product 	
portfolio combining premium and large mainstream brands, broad geographical 	
diversification, leading and increasing market shares and an unrivalled 	
potential for cost savings and economies of scale.	
	
Volkswagen's profitability is also above sector average. Operating margin 	
improved again in 2011 to 7.1% from 5.6% in 2010, excluding the robust 	
double-digit margins from its Chinese operations reported as joint ventures. 	
Margins are set to remain strong in the coming years as the group benefits from 	
significant synergies between its various brands and its modular strategy to 	
share costs. Fitch expects the aggressive pricing environment in Europe to weigh	
somewhat on margins in 2012, but this should be mitigated by still solid margins	
in other regions.	
	
Liquidity is also healthy, supported by a high net cash position from industrial	
operations and Volkswagen's substantial free cash flow generation ability. 	
Reported automotive net cash (before adjustments for operating leases, EUR6.4bn 	
at end-2011) was EUR15.8bn at end-Q112, slightly up from EUR15bn at end-2011, 	
including EUR8.1bn of financial debt and EUR23.9bn of gross liquidity 	
(industrial operations).	
	
The ratings also incorporate lingering M&A risk and corporate governance 	
relatively weaker than close peers. In particular, resolution of the merger with	
Porsche remains uncertain in its form, timing and cost. The two companies may 	
exercise a series of put/call options but are currently looking at options to 	
minimise a substantial tax burden of up to EUR1bn that would be triggered if the	
options are exercised before H214. Fitch also believes that the group is likely 	
to consolidate its stake in the truck sector and further increase its 	
participation in heavy-truck makers Scania and/or MAN. The recent acquisition of	
motorcycle manufacturer Ducati is another illustration of ongoing M&A risk.	
	
The Outlook revision to Positive on Volkswagen's ratings is chiefly driven by 	
Fitch's opinion that the group will be able to accommodate the cash outflow 	
related to the Porsche transaction without jeopardising its financial profile. 	
However, the Outlook could be revised back to Stable if the costs and cash 	
outlay related to this deal are much above Fitch's current conservative-case 	
assumptions of up to EUR5bn. An unfavourable timing for this transaction, for 	
example if it happens during a sharp slowdown or if it is combined with other 	
significant cash outflows (including other M&A or accelerated capex investments)	
could also lead to a deterioration of credit metrics and a stabilisation of the 	
Outlook. 	
	
Daimler's ratings are supported by its solid market shares in the premium 	
passenger car segment, as well as the van, bus and heavy-truck sectors. Fitch 	
expects the group's MBC division (Mercedes Benz and smart brands) to maintain a 	
strong growth in the foreseeable future, from continuously high and profitable 	
demand in emerging markets, notably China, and the group's current product 	
offensive. The heavy-truck division (Daimler Trucks - DT) will also benefit from	
the comprehensive product launch started in 2011.	
	
The group's financial profile is solid, backed by an extremely healthy 	
liquidity. The group has historically reported a strong net cash position. 	
Before adjustment for operating leases (EUR4bn at end-2011), net industrial 	
liquidity excluding currency hedges was EUR12.4bn at end-2011. Profitability is 	
robust but Fitch notes that Daimler's operating profit still lags behind its 	
main German peers BMW and Audi. Although this does not directly constrain 	
ratings as margins above 7-8% are already comfortable for the current ratings, 	
this indicates a lower efficiency but also potential for further progress on the	
cost structure as Daimler is keen on being at par with its domestic peers.	
	
Daimler's ratings remain constrained by the typically high cyclicality and 	
volatility of the heavy-truck sector, which can pull down group's profitability 	
during industry or economic downturns. Evidence that the cyclicality of the 	
truck division has diminished, in particular if DT manages to post more stable 	
and of at least 3% EBIT margin even during downturns, could lead to an upgrade. 	
More generally, a positive rating action could be triggered by the group meeting	
both of its main targets for MBC and DT profitability (10% and 8% EBIT margin 	
through the cycle, respectively).	
	
The rating actions are as follows:	
	
Daimler AG: 	
Long-term IDR affirmed at 'A-'; Outlook Stable	
Senior unsecured debt affirmed at 'A-'	
Guaranteed notes affirmed at 'A-' and 'F2'	
Short-term IDR affirmed at 'F2'	
Commercial paper affirmed at 'F2'	
	
Mercedes-Benz Australia/Pacific Pty. Ltd.:	
Guaranteed notes affirmed at 'A-' and 'F2' 	
	
Daimler International Finance BV:	
Senior unsecured debt affirmed at 'A-'	
Guaranteed notes affirmed at 'A-' 	
Short-term affirmed at 'F2'	
	
Mercedes-Benz Japan Co. Ltd.:	
Guaranteed notes affirmed at 'A-' and 'F2' 	
	
Daimler Finance North America LLC:	
Senior unsecured debt affirmed at 'A-'	
Guaranteed notes affirmed at 'A-' and 'F2' 	
Short-term affirmed at 'F2'	
	
Daimler Canada Finance Inc.:	
Senior unsecured debt affirmed at 'A-'	
Short-term affirmed at 'F2'	
	
Mercedes-Benz South Africa (Pty) Ltd.:	
Guaranteed notes affirmed at 'A-' and 'F2' 	
	
Daimler Mexico S.A. de C.V.:	
Guaranteed notes affirmed at 'A-' and 'F2' 	
	
Volkswagen Group:	
Long-term IDR affirmed at 'A-'; Outlook Revised to Positive from Stable	
Senior unsecured debt affirmed at 'A-'	
Short-term IDR affirmed at 'F2'	
	
 (Caryn Trokie, New York Ratings Unit)	
 

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