DBRS Confirms AB Volvo at A (low)

DBRS has today confirmed the Issuer Rating of AB Volvo (Volvo or the Company) at A (low) with a Stable trend, reflecting Volvo’s improved business profile following a string of recent acquisitions while maintaining a financial profile that remains acceptable with the assigned ratings.

Volvo has made three noteworthy acquisitions over the past nine months. In September 2006, the Company acquired 70% of Shandong Lingong Construction Machinery Co., (Lingong), positioning Volvo as the first foreign manufacturer of construction equipment in China with a nationwide dealer network. In February 2007, the Company announced a further two acquisitions of more significance: Road Equipment Division of Ingersoll Rand (IR-Road) for SEK 8.8 billion; and an additional 77% equity interest (for a 96% total interest) in Nissan Diesel Motor Co. Ltd. (Nissan Diesel) for SEK 7.4 billion.

Through these acquisitions, Volvo’s Construction Equipment division becomes firmly established as the world’s third largest in the construction equipment sector, with increased road development capabilities and an enhanced distribution network. Volvo’s core trucking operations in turn gain a significant entry into the strategic Asian market. While acknowledging the integration risks associated with these transactions, DBRS points to Volvo’s strong track record (e.g., Renault, Mack) in this regard and expects the Company to successfully incorporate the acquired entities. The increased product and geographic diversification should stabilize Volvo’s profitability going forward, with the Company’s recent focus in growing its aftermarket services also helping to smooth future earnings.

The Company’s liquidity has been materially reduced as a result of the recent acquisitions, with SEK 20.2 billion in dividends in Q2 2007 further affecting Volvo’s financial profile. However, DBRS notes that Volvo’s credit metrics remain well in line with the current ratings. DBRS is comfortable with the Company’s revised stated gearing (net debt-to-equity ratio) ceiling of 40% and believes that management will be disciplined in its adherence to this target.

Apart from current weakness in the North American trucking market (due to extensive pre-buying in 2006 as a result of increasing emissions regulations effective in 2007), prospects in all of the Company’s business segments are positive over the near to medium term, providing further support for the ratings.

Notes:
All figures are in Swedish kronors unless otherwise noted.
The issuer and commercial paper ratings of Volvo Treasury Canada Inc. are 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.

Ratings

Back to top