DBRS Confirms DaimlerChrysler AG and Related Subsidiaries at A (low), Trends Remain Negative

Dominion Bond Rating Service (DBRS) has today confirmed the long-term ratings of DaimlerChrysler AG (DaimlerChrysler or the Company) and related subsidiaries at A (low) with Negative trends and the Commercial Paper ratings at R-1 (low) with Stable trends. The confirmations reflect an improving financial profile at the Company as evidenced by stronger results in the first half of 2006. However, DBRS has decided to maintain a Negative trend on the long-term ratings for the following reasons: (1) Concerns about the Chrysler Group’s (Chrysler) ability to sustain its profit momentum in view of recent negative developments; and (2) The uncertainty of a turnaround at the smart brand.

DBRS notes that the Mercedes Car Group (MCG) has made good progress in turning around the operations of its Mercedes-Benz brand. Quality improvement, new model introductions and benefits from productivity initiatives have led to a strong rebound in operating profits (excluding non-recurring charges). The recovery at Mercedes-Benz has helped to stabilize the financial profile of the Company. However, growing problems at Chrysler and ongoing difficulties at smart could still stall the Company’s recovery. Increasingly difficult market conditions in North America and the lack of new models has started to pressure Chrysler’s performance. Operating results at Chrysler in the first half of 2006 were below DBRS’s expectation. Market outlook is deteriorating in North America, Chrysler’s key market. Persistent high gasoline prices have turned consumers away from the more profitable SUVs and pick-up trucks. In addition, high gasoline prices coupled with rising interest rates could slow the U.S. economy and dampen the demand for automobiles, increasing the challenge for Chrysler. The smart brand has continued to disappoint despite a number of restructuring efforts. It is uncertain if the latest efforts could turn the loss-making business around.

DBRS notes that business diversity is a key strength supporting the Company’s current ratings. The outlook of the Company’s other businesses, the Mercedes-Benz brand, heavy trucks and financial services, is generally positive. Contributions from the healthy businesses give DaimlerChrysler the resources and the time to take corrective actions. Moreover, the Company has further strengthened its already strong balance sheet and liquidity position with asset sales and debt reduction. The Company should have no liquidity concerns in funding its operations. DBRS would change the trend to Stable once there is enough evidence to show that the Company has addressed concerns at both smart and Chrysler. However, further deterioration at Chrysler and set backs at the smart brand would put the Company’s ratings under pressure.

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.

Ratings

Back to top