DBRS Morningstar Confirms AB Volvo at A (low), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at A (low) with a Stable trend. The rating incorporates the Company’s sound business risk assessment as one of the world’s largest truck manufacturers and a major global player in construction equipment (CE). Moreover, as a function of Volvo’s consistent operating performance and conservative financial policy (targeting a net cash position for its industrial operations), the Company’s financial risk assessment (FRA) affords meaningful cushion in the context of the assigned rating.

As with several other truck manufacturers, the Company’s 2020 industrial revenues and profitability were down significantly year over year (YOY) in line with the global progression of the Coronavirus Disease (COVID-19) that adversely affected both production and demand. Specifically regarding Volvo’s Truck segment (which typically represents the significant majority of industrial earnings), 2020 global deliveries decreased by 28% YOY, with the most pronounced decline being in North America (down 49% YOY) and volumes in the Company’s core European truck market contracting by 23% YOY. In Volvo’s CE segment (the additional material contributor to industrial earnings, albeit to a significantly lesser degree than the Truck segment), softening worldwide construction activity was considerably offset by a strong recovery in the key Chinese market, with the decline in segment net sales therefore being more moderate at 8% YOY. Despite the meaningful drop in volumes across its businesses, Volvo’s operating performance proved quite resilient as (in addition to countermeasures directly in response to the pandemic) it benefitted from previously implemented cost reduction activities and the ongoing relative growth of its higher-margin service business. As such, the Company’s 2020 industrial operating margin remained sound at 7.4%. Moreover, supported by withdrawn dividends and capital expenditure reductions, Volvo’s liquidity position persisted at strong levels through the year. Finally, notwithstanding lower truck volumes, higher credit provision expenses, and adverse foreign exchange effects, the Company’s financial services segment remained profitable while generating cash in line with the reduced growth of its receivables portfolio.

Going forward, conditions across Volvo’s key markets are expected to improve following last year’s contraction, with the Company’s performance in Q1 2021 being very solid amid an increase in volumes. Accordingly, taking further into account Volvo’s strong FRA relative to the assigned rating, DBRS Morningstar considers it unlikely that the rating will be subject to negative pressures in the foreseeable future. However, the Stable trend reflects short-term challenges, notably ongoing uncertainty regarding a subsequent wave of the pandemic in addition to strains in the supply base, highlighted by the global semiconductor shortage. These have caused the Company to plan production stoppages in Q2 2021 (such interruptions possibly extending to four weeks). Additionally, structural headwinds persist in the form of increasing investment requirements associated with the progressive electrification of Volvo’s products. Should the Company’s performance momentum be restored despite these challenges, a positive rating action could result.

ESG CONSIDERATIONS
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 Swedish krona (SEK) 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), Rating Companies in the Industrial Products Industry (January 29, 2021; https://www.dbrsmorningstar.com/research/372944), and DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), 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 rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar did not have 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. DBRS Morningstar used Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020) as the primary rating methodology in order to assess Volvo’s Truck operations, which typically represent the significant majority of the Company’s industrial earnings. The application of Rating Companies in the Industrial Products Industry (January 29, 2021) was used to assess the Company’s CE business (the additional material contributor to industrial earnings, albeit to a significantly lesser degree than the Truck segment). DBRS Morningstar considers the proportionate earnings derived from each of these two business segments when assigning relative weights to the respective methodologies. Finally, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020) was applied to determine the equity treatment of the hybrid note issuance(s) by Volvo.

The last rating action on this transaction took place on May 5, 2020, when DBRS Morningstar confirmed the Issuer rating of AB Volvo at A (low) with a Stable trend.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

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: April 12, 2005

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at info@dbrsmorningstar.com.

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

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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 Industrial Products Industry (January 29, 2021)
https://www.dbrsmorningstar.com/research/372944
-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020)
https://www.dbrsmorningstar.com/research/369165