DBRS Confirms AB Volvo and Volvo Treasury Canada Inc.

DBRS has today confirmed the Issuer Rating of AB Volvo and of Volvo Treasury Canada Inc. (Volvo or the Company, collectively) at A (low) and the Commercial Paper at R-1 (low); they are all with Stable trends. The confirmation follows today’s announcement that the Company has made a public cash offer to acquire the remaining 81% equity interest in Nissan Diesel Motor Co., Ltd. (Nissan Diesel)that it did not previously own for SEK 7.5 billion (approximately US$1.1 billion) and assume roughly SEK 7.5 billion in Nissan Diesel debt. The impact of the acquisition on Volvo’s credit profile is slightly negative but not sufficient to warrant a change in the rating.

Volvo has the ability to fund the acquisition with existing cash, and leverage is expected to remain reasonable. On a pro forma basis, gross debt-to-capital (excluding financial services) increases to 16.6% (from 10.1% at year-end 2006). When including the proposed payment of roughly SEK 20 billion in dividends (SEK 10 billion in special dividends, SEK 10 billion in ordinary dividends, scheduled for April 2007), the Company’s net debt measurably changes to approximately SEK 15 billion (from a net cash position). However, pro forma net debt-to-capital and coverage ratios remain acceptable for the current ratings. In addition, Volvo is expected to continue to generate good cash flow, which provides a degree of financial flexibility. The acquisition of Nissan Diesel is expected to close at the end of March 2007 (subject to regulatory approval) and will be accretive to Volvo’s earnings and cash flow. While margins will be slightly lower, annual synergies of more than SEK 1.8 billion (roughly US$260 million) are expected over five years, largely from increased purchasing volumes.

Volvo indicated in late 2006 that planned uses of its large cash position could include acquisitions and dividends. The investment is consistent with the Company’s strategy and complements its existing geographic and product mix. The acquisition exposes Volvo to integration risk, but the Company has demonstrated a favourable history of successfully integrating acquisitions (e.g., Mack Trucks, Inc. and Renault Trucks.). DBRS notes that while truck demand in North America is expected to materially slow in 2007 (mainly related to emission-regulation pre-buying in 2006), Volvo’s credit profile is expected to remain acceptable for the rating.

Nissan Diesel has a favourable market position in Japan (24% heavy-duty truck market share, 15% in the medium-duty segment) – a region where Volvo has a modest presence (Asia in total accounted for roughly 6% of total Volvo truck deliveries in 2006). In addition, Volvo is expected to benefit from Nissan Diesel’s strong engine technology, notably with respect to medium-heavy trucks in advance of Japanese emission regulations in 2009–2010 and from shared access of sales channels and product development.

Note:
All currency is in Swedish kronor unless otherwise noted.
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.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.

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