DBRS Morningstar Upgrades Mercedes-Benz Group AG’s Credit Ratings to “A” from A (low) and Assigns “A” to Mercedes-Benz International Finance B.V., All Trends are Stable

DBRS Limited (DBRS Morningstar) upgraded the long-term credit ratings of Mercedes-Benz Group AG (Mercedes or the Company) as well as subsidiaries Mercedes-Benz Finance Canada Inc. and Mercedes-Benz Finance North America LLC to “A” from A (low). Concurrently, DBRS confirmed the associated short-term credit ratings at R-1 (low). DBRS Morningstar also assigned a Medium-Term Notes credit rating of “A” to Mercedes-Benz International Finance B.V. (MBIF). MBIF’s credit rating is consistent with that of its ultimate parent, Mercedes. The credit rating equivalency takes into account the guarantee between Mercedes and MBIF, in addition to DBRS Morningstar’s assessment of MBIF as a strategically important subsidiary of Mercedes. All trends are Stable. The long-term credit ratings upgrade reflects the Company’s persistent solid earnings performance (that has exceeded DBRS Morningstar’s expectations), notwithstanding various meaningful headwinds that include interest rate and inflationary pressures, geopolitical uncertainty, and ongoing supply constraints. This resilient financial performance amid Mercedes’ conservative financial policy, results in a financial risk assessment (FRA) that remains strong even in the context of the upgraded credit ratings.

The Company’s 2022 operating performance improved considerably year over year, with the industrial operations attaining a solid annual operating margin of 11.2% (as calculated by DBRS Morningstar). Positive factors included stronger pricing, firmer product mix, and slightly higher volumes. These were partly offset by inflationary pressures, including higher raw material and supply chain costs, as well as increased investments in future technologies and vehicles. Through the first nine months of 2023, Mercedes’ earnings remained solid; the industrial operating margin attaining a level of 11.7% over the period. DBRS Morningstar notes that the Company’s performance has remained on track despite numerous meaningful headwinds (in addition to those cited immediately above) such as, ongoing supply constraints (that curtailed Mercedes’ deliveries of 48-volt light hybrid models), very weak market conditions in China, and increasing competitive pressures in the electric vehicle (EV) space.

Going forward, DBRS Morningstar acknowledges that pent-up demand (that has bolstered vehicle sales and pricing) could significantly unwind over the near-term. Additionally, consumer sentiment may further weaken, placing additional pressure on demand levels. However, DBRS Morningstar deems Mercedes to be well suited to withstand these challenges given its established position in the premium automotive segment, which (while not immune) is typically considerably more resilient to cyclical downturns compared with mainstream auto manufacturers. To this end, Mercedes is progressively refining its product portfolio to place additional emphasis on its top-end vehicles. The Company is also implementing several efficiency initiatives to mitigate the ongoing cost and investment headwinds facing the industry. Finally, in the event that the adoption of EVs slows markedly over the medium term, Mercedes’ current production facilities maintain the flexibility to produce both EV and internal combustion engine (ICE) models, providing the Company with tactical flexibility to allocate such production consistent with underlying demand levels.

Consistent with the Stable trends, DBRS Morningstar expects the credit ratings to remain constant amid ongoing strong cash flow generation. While somewhat unlikely given the cushion afforded by the Company’s FRA, significantly weaker earnings amid ongoing high investments tied to the progressive electrification of Mercedes’ automotive fleet—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative credit rating implications. Conversely, an upgrade is also unlikely and not anticipated over a similar time horizon in line with the sizable cost and investment headwinds facing the industry.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Mercedes is subject to a wide range of environmental compliance requirements relating to carbon dioxide (CO2), fuel efficiency, emissions control, and other factors. In the event that the Company would not comply with applicable regulations, significant penalties and reputational harm could result. Correspondingly, the Company announced its Ambition 2039 initiative, which targets CO2-neutrality of Mercedes vehicles across their lifecycles. This includes climate neutrality among the Company’s supply base, CO2-neutral production across its global production facilities, as well as the CO2-neutrality of Mercedes vehicles during the utilization phase. The expected costs of compliance with global environmental regulations and in pursuit of Mercedes’ Ambition 2039 initiative are sizable.

While the Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the credit ratings or the trends assigned to Mercedes.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

DBRS Morningstar notes that this press release was amended on 19 December 2023 to incorporate the disclosure confirming that this is the first DBRS Morningstar credit rating on this financial instrument.

Notes:
All figures are in euros unless otherwise noted.

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 11, 2023; https://www.dbrsmorningstar.com/research/421716)
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 following additional regulatory disclosures apply to Mercedes, Mercedes-Benz Finance Canada Inc., and Mercedes-Benz Finance North America LLC.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

The following additional regulatory disclosures apply to MBIF.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit 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 credit ratings:

This is the first DBRS Morningstar credit rating on this financial instrument.

Regarding MBIF, with respect to the Financial Conduct Authority (FCA) and European Securities and Markets Authority (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

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 credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the ESMA in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the FCA in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Credit Rating Committee Chair: Timothy O’Brien, Managing Director, Diversified Industries
Initial Credit Rating Dates: Mercedes – August 29, 2000; Mercedes-Benz Finance Canada Inc. – May 19, 1995; Mercedes-Benz Finance North America LLC – November 14, 2016; MBIF – November 16, 2023

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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