DBRS Morningstar Confirms PACCAR at AA (low) and R-1 (middle), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of PACCAR Inc at AA (low) and the Senior Unsecured Debt and Commercial Paper ratings of PACCAR Financial Ltd. (together with PACCAR Inc, PACCAR or the Company) at AA (low) and R-1 (middle), respectively. All trends are Stable. The confirmation of the ratings is supported by PACCAR's strong business risk assessment as a global premium truck manufacturer with solid market positions in North America and Europe and its outstanding brand strength and high operating efficiencies. Additionally, PACCAR's financial risk assessment is inordinately strong, reflective of its consistent operating performance and exceedingly conservative financial policy, with the Company having essentially no industrial indebtedness.

Similar to several other truck manufacturers, PACCAR's 2020 industrial revenues and operating profits were down significantly year over year (YOY) in line with the global progression of the Coronavirus Disease (COVID-19) pandemic that adversely affected both production and demand. In 2020, truck deliveries decreased by 32.9% YOY, with the largest decline in North America, followed by Europe and other regions. This notwithstanding, PACCAR’s market position across these key regions remained effectively intact, with the Company also benefitting from the resilience of its after-market parts business, reflecting a higher population base of PACCAR trucks and engines and positive marketing efforts. Accordingly, despite the sizable challenges associated with the coronavirus pandemic, the Company remained significantly profitable, with operating margins for the industrial operations last year being reasonably solid at 7.8% (albeit notably weaker than the 11.1% margin generated in 2019). Similarly, financial services operations results remained profitable despite a contraction in pretax earnings of 25% YOY to $223 million, mainly as a function of lower truck results, lower interest rates, and higher provisions for credit losses (partly offset by lower selling, general, and administrative expenses).

Following last year's marked contraction, which was substantially attributable to the coronavirus pandemic, the global truck industry is projected to significantly recover in 2021, with this recovery estimated to result in double-digit volume growth for the Company. The Stable trends reflect DBRS Morningstar’s expectations that PACCAR’s stellar credit metrics will persist at their current level for the medium to long term because of the Company’s consistent operating performance and very conservative financial policy. Given that PACCAR’s ratings are already at a very high level compared with its peers, DBRS Morningstar sees limited potential for a positive rating action in the medium term. Conversely, in the event of a severe industry downturn or a marked shift in the Company’s financial policy, there could be negative rating implications, although DBRS Morningstar deems this to be highly unlikely.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020; https://www.dbrsmorningstar.com/research/368670), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/research/372344), 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).

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.

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 info@dbrsmorningstar.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:

Each of the principal asset class 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 22, 2020) was applied as the primary rating methodology in determining the rating of the parent company, PACCAR Inc. Subsequently, DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021) was applied in determining the ratings of PACCAR Financial Ltd., which benefits from a Keep Well Agreement with PACCAR Inc. The Keep Well Agreement, 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 PACCAR Inc’s rating to PACCAR Financial Ltd. 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 Paccar Financial Ltd.’s Commercial Paper rating was consistent with DBRS Morningstar criteria.

The last rating action on this transaction took place on April 13, 2020, when the long- and short-term ratings of the Company were confirmed at AA (low) and R-1 (middle), respectively.

Generally, 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: 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, Autos
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: September 19, 2000

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020),
https://www.dbrsmorningstar.com/research/368670/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021),
https://www.dbrsmorningstar.com/research/372344/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 9, 2021),
https://www.dbrsmorningstar.com/research/375001/dbrs-morningstar-criteria-commercial-liquidity-support-for-nonbank-issuers