DBRS Confirms Ratings for AB Volvo and Volvo Treasury Canada

Dominion Bond Rating Service (“DBRS”) has today confirmed the Commercial Paper and Issuer Ratings of Volvo Treasury Canada Inc. and AB Volvo (collectively “Volvo” or the “Company”) at R-1 (low) and A (low), respectively. The trends are Stable. The credit profile for profile Volvo remains on track for the above noted ratings.

Volvo is the second largest global heavy-truck producer, with strong market penetration in its key markets of Europe and North America. The Company’s business risk profile is favourable and generally in line with that of its industry peers. The strength in Volvo’s credit metrics since 2004 is largely attributable to robust demand for heavy trucks, its core segment. Heavy truck sales in North America have been the key driver of earnings and cash flow growth, given the continuing U.S. transportation industry boom (Volvo is sold out through 2006 in the U.S.). Rising order bookings and prices have more than offset costs related to high/rising raw materials (i.e. steel), energy, and new product launches.

Volvo’s credit metrics are above levels considered acceptable for the rating. However, they reflect near-top-of-the-cycle conditions for the Company’s truck, construction equipment, and bus segments, which are highly tied to prevailing economic conditions. Heavy truck deliveries, particularly in the U.S., have been historically highly volatile and slowing economic growth (post-2006) is expected to weaken profitability. In addition, heavy truck and bus volumes will decline in 2007 (i.e. pre-buying in advance of new emission standards – see report), but the magnitude/potential impact is uncertain. Volvo’s bus segment has improved from restructuring initiatives, but remains a modest contributor to operating results. In the event Volvo’s earnings exceed expectations and are considered sustainable through a cycle, a positive rating action is possible.

DBRS also notes that the downside risk to the rating is limited due to the following: (1) Volvo’s core businesses are well diversified geographically, which provides relative earnings and cash flow stability. Volvo is also the largest diesel engine producer globally, which provides a competitive advantage. (2) Volvo has a strong balance sheet (virtually debt free, excluding Financial Services) and substantial liquidity, which add financial flexibility. (3) Volvo is well positioned to expand in Asia, following its investment in Nissan Diesel. Expansion into China, along with synergies from its global truck production platform, provides medium/long-term growth potential that should help moderate European and North American cyclicality/maturity. (4) Volvo’s large and growing Financial Services segment provides a significant source of income and support for Volvo’s industrial operations.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.
Rating of Volvo Treasury Canada Inc. based on parent and guarantor, AB Volvo.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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