DBRS Confirms DaimlerChrysler AG and Related Companies at BBB (high) and R-1 (low)

DBRS has confirmed the ratings of DaimlerChrysler AG (DaimlerChrysler or the Company) and its related companies at BBB (high) and R-1 (low) following the Company’s announcement today that it is divesting a majority stake in its Chrysler Group (Chrysler) and related financial services businesses for €5.5 billion (approximately US$7.4 billion) to an affiliate of Cerberus Capital Management LP (Cerberus). DBRS believes that the transaction is modestly positive to DaimlerChrysler.

The sharp deterioration at Chrysler was the main reason for DBRS’s downgrade of the Company’s long-term ratings on February 14, 2007 (see DBRS press release for details). The positive impact is moderated by the sale at a discount to the book value of Chrysler and the loss of a significant portion of the potential benefits from a successful turnaround at Chrysler. The closing of the transaction is expected to take place in the third quarter of 2007 subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals and Cerberus financing arrangements.

DBRS notes that DaimlerChrysler will set up a new company, Chrysler Holding LLC (Chrysler Holding) to hold 100% each of the future Chrysler Corporation LLC, which produces and sells Chrysler, Dodge and Jeep vehicles, and the future Chrysler Financial Services LLC, which provides financial services for these vehicles in the NAFTA region. An affiliate of Cerberus will make a capital contribution of €5.5 billion in return for an 80.1% equity interest in Chrysler Holding. DaimlerChrysler will hold the remaining 19.9% equity in Chrysler Holding.

The cash contribution by Cerberus will be retained by Chrysler Holding, with €3.7 billion flowing into the industrial business and €0.8 billion into the financial services business. Chrysler Holding will be completely debt free but retain the financial obligations for pension and health-care benefits toward its employees. (At the end of 2006, Chrysler’s pension plan was about €1.0 billion overfunded and other post-employment pension (OPEB) plans were underfunded by about €14 billion.)

DaimlerChrysler has announced that the financial impact of the transaction is expected to reduce its net profit, according to International Financial Reporting Standards (IFRS), in 2007 by about €3 billion to €4 billion and a net cash outflow of €0.5 billion. The Company’s leverage is not expected to be materially affected. DBRS notes that the impact on net profit in 2007, although material, is a one-off mostly related to a write-off of Chrysler assets. Moreover, this transaction has significantly reduced DaimlerChrysler’s exposure to the turnaround of Chrysler, which DBRS deems as positive.

Chrysler is facing significant headwinds in its turnaround, including a deteriorating U.S. automotive market caused by rising gasoline prices and a deteriorating housing market; shifting consumer preference to more fuel-efficient vehicles away from light trucks, Chrysler’s product strength; rising raw-material costs and increasing competitive pressures, notably from Asian producers. DaimerChrysler’s remaining businesses remain strong. DBRS expects DaimlerChrysler to show improving profitability on a go-forward basis without the negative impact from Chrysler. However, DaimlerChrysler will not benefit fully if Chrysler is successful in executing its turnaround.

DBRS notes that DaimlerChrysler guarantees all outstanding bonds of DaimlerChryler, but not the commercial paper of DaimlerChrysler North American Holding Corporation, which is supported by a keepwell agreement. In addition, according to today’s agreement, DaimlerChrysler will have to discharge the long-term liabilities of the Chrysler Group, which were at €1.8 billion at the end of 2006. This will result in DaimlerChrysler incurring a prepayment cost of approximately €650 million. The Company continues to have strong liquidity and should have no problems funding the discharge.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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