DBRS Confirms AB Volvo and Volvo Treasury Canada Inc. at A (low) & R-1 (low)

DBRS has today confirmed the Issuer Ratings 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 assets of the Road Development Division of Ingersoll Rand (IR-Road) for SEK9.2 billion (USD1.3 billion). The rating action reflects that the acquisition will strengthen the Company’s construction equipment business, and the Company’s financial profile remains acceptable for the current ratings even though this acquisition, together with the Nissan Diesel Motor Co., Ltd. (Nissan Diesel) acquisition last week (see DBRS press released dated February 20, 2007) have materially eroded the Company’s liquidity position and weakened its debt coverage ratios. The acquisition is expected to close in the second quarter of 2007 subject to regulatory approvals.

The acquisition of IR-Road assets is expected to be neutral to the Company’s earnings in 2007 and be accretive thereafter. Moreover, the Company expects synergies from leverage sales and cost rationalization to generate SEK600 million annually after five years. DBRS does not expect any major problems in integrating the IR-Road operations in view of the Company’s track record in assimilating acquired operations. Volvo has the ability to fund the acquisition with existing liquidity. The Company was virtually debt free at the end of 2006 (cash exceeded debt by over SEK20 billion). However, with the previously announced acquisition of additional Nissan Diesel shares and the proposed payment of roughly SEK20 billion in dividends (SEK10 billion in special dividends, SEK10 billion in ordinary dividends, scheduled for April 2007), the Company has changed to approximately SEK15 billion in net debt, on a pro forma basis. The proposed acquisition of the assets of IR-Road for SEK9.2 billion will boost the net debt, on a pro forma basis, to exceed SEK24 billion. The pro forma net debt-to-capital and coverage ratios remain acceptable for the current ratings.

However, with the North American heavy truck market forecasted to weaken markedly in 2007 due to a change in engine emission regulations, DBRS expects the Company’s earnings and cash flow to decline from the high level in 2006. The increase in debt as a result of the announced acquisitions coupled with a decline in profitability would cause the Company’s financial metrics to be at the lower end of the rating range in the near term. Furthermore, the Company has stated that it would make further acquisitions to strengthen its existing businesses. More debt financed major acquisitions would cause the Company’s financial profile to become aggressive for the current ratings. Nevertheless, DBRS expects the Company to exercise diligence in maintaining a conservative financial profile. In addition, DBRS expects the Company to continue to generate good cash flow, albeit at a lower level, which provides a degree of financial flexibility.

The Road Development Division of Ingersoll Rand is a leading global manufacturer of heavy road building equipment including a full range of compactors, pavers, milling equipment and material handling equipment. Products are marketed under the ABG, Blaw-Knox and Ingersoll Rand brands with a strong presence in North America. The acquisition of IR-Road will strengthen the Company’s Construction Equipment business’ market position by broadening its product line to the road construction segment as a leading player.

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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