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, strong brands and product quality, as well as high operating efficiencies. Additionally, PACCAR's financial risk assessment is inordinately strong because of its consistent operating performance and exceedingly conservative financial policy, with the Company having essentially no industrial indebtedness.

PACCAR's 2021 industrial revenues and operating profits increased year over year (YOY) as a result of strong sales performance and firmer pricing in line with favourable economic conditions, despite headwinds in the form of the global semiconductor shortage. In 2021, truck deliveries increased by 22.1% YOY, with higher unit sales across each of PACCAR's major geographic markets, notwithstanding the moderate decline in market position in certain segments. In addition, the aftermarket parts business continued to be a stable contributor to PACCAR's revenues and earnings, partly benefitting from the high number of the Company's trucks and engines in the market and a network of more than 2,200 dealers globally. As a result, the Company's industrial business delivered strong operating performance with the operating margin increasing to 8.5% in 2021 (from 7.8% in the previous year). PACCAR's financial services operations also achieved strong results with pre-tax earnings increasing by 96% YOY mainly as a function of higher used truck values, lower provisions for credit losses, and positive foreign exchange movements.

DBRS Morningstar expects PACCAR to continue to improve its financial performance in 2022 as a result of higher volumes in line with projected favourable demand, although the Company expects deliveries to remain affected by supply base challenges. DBRS Morningstar also expects PACCAR’s credit metrics to persist at their current strong levels over the medium to long term given the Company’s consistently strong earnings 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 unlikely.

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 U.S. dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), 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. 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).

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 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 14, 2021) 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” (April 4, 2022) 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 1, 2022) 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 12, 2021, 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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: September 19, 2000

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting 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 14, 2021)
https://www.dbrsmorningstar.com/research/385892/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022)
https://www.dbrsmorningstar.com/research/394683/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 1, 2022)
https://www.dbrsmorningstar.com/research/393065/dbrs-morningstar-criteria-commercial-liquidity-support-for-nonbank-issuers