DBRS Upgrades DaimlerChrysler AG’s Long-Term Rating to A (low), Trend Stable

DBRS has today upgraded the long-term ratings of DaimlerChrysler AG (Daimler or the Company) and its related companies to A (low) from BBB (high), all with a Stable trend. Concurrently, DBRS has confirmed the Commercial Paper ratings of the entities at R-1 (low) with a Stable trend. The upgrade reflects the Company’s stronger business risk profile and operational improvements in its ongoing businesses. With this rating action, the Company is removed from Under Review with Positive Implications where it was placed on August 31, 2007.

The Company completed the sale of a majority stake (80.1%) in the Chrysler Group (Chrysler, Issuer Rating rated B by DBRS) and the related financial services in the NAFTA region to a subsidiary of Cerberus Management Capital LLC (Cerberus) on August 3, 2007. This divestiture removed a huge uncertainty overshadowing the Company’s outlook. Chrysler has a weak business profile with an uncompetitive cost structure against the Asian producers, a weakening market position and a lack of geographical diversification. The sale of Chrysler has the following immediate benefits to the Company: (1) Daimler’s operating results will benefit from eliminating the losses and associated cash outflow at Chrysler. (2) The sale will free up the Company’s resources for more productive uses. (3) The sale will remove a major distraction to senior management. (4) The sale has eliminated a potential risk of having to fund the large other post-retirement (excluding pension) liabilities at Chrysler.

Going forward, the Company’s industrial businesses will focus on the premium segment of the automotive market, commercial trucks, vans and buses, where Daimler has a strong position globally in each of these businesses. After selling Chrysler, the Mercedes Car Group (MCG) will be the dominant business at Daimler. MCG operates in the premium segment of the automotive market, which is growing, more profitable and less volatile. However, selling Chrysler will also reduce by half the size of the Company’s finance operations, a meaningful and stable profit contributor. On balance, the Company’s business risk profile is stronger without Chrysler.

DBRS notes that Daimler has made solid progress in correcting the operating issues affecting its financial performance. MCG implemented an efficiency improving program, CORE, in 2005 and MCG has achieved a meaningful improvement in its product quality and production efficiency. Benefits from CORE have been reflected in the sharp improvement in the operating results at MCG, whose adjusted operating margin (as defined by DBRS) reported a substantial increase from just 2.4% in 2005 to 8.4% in the first half of 2007. The improvement at MCG has also exceeded the Company’s initial target. Furthermore, the Truck Group (Truck) has demonstrated that the structural improvement in its operations has enabled it to maintain its profit level despite an expected sharp decline in demand in the NAFTA region. Going forward, DBRS expects the Company to report steady improvements in operating profits with MCG showing further strengths, while Truck is expected to sustain its current performance. The introduction of the new C Class, MCG’s largest volume car, in the second half of 2007 in North America is a key positive factor. Moreover, the restructuring at the smart brand is on track and DBRS believes that smart is no longer a drain on the Company’s resources. However, the softening of the automotive market in the United States due to a sharp deterioration in the residential housing sector is a concern. The continuing weakness in one of the Company’s major markets for automobile and trucks could undermine the group’s overall performance.

The Company continues to have a strong balance sheet and has a net liquidity position (cash and marketable securities net of debt) of €13.9 billion at the industrial business group at the end of June 30, 2007. The sale of Chrysler had a less than expected negative impact on the Company’s financial position. The cash impact of the sale is an outflow of €0.5 billion with an additional €0.3 billion for related transaction costs. The Company decision to redeem some Chrysler debt early has cost a further €0.5 billion (€0.1 billion to be booked in the third quarter of 2007). The impact on the equity base is also expected to be modest (€2.5 billion). A majority of the charge is from revaluating the deferred tax assets. In addition, the Company has decided to sell the discontinued entities (Chrysler and the related financial services in NAFTA) free of debt as a result of the guarantee on their term debts. This has led to a sharp increase in the gross debt of the industrial business group. However, Cerberus has also reimbursed the Company for the finance portfolio in Chrysler Financial Services, resulting in a higher net liquidity (cash) position in the industrial business group. Moreover, the Company is committed to actively deleveraging the balance sheet to a level more compatible with the A (low) rating. Although current credit metrics are much weaker than historic levels, DBRS is not concerned because, based on DBRS estimates, the normalized debt coverage ratios remain strong. On August 29, 2007, the Company announced that it plans to buy back up to €7.5 billion of its own shares within the next twelve months. DBRS expects the Company to continue to generate strong free cash flow and should have no problems funding its operating needs and the share buybacks from internal resources. Going forward, DBRS expects the Company’s balance sheet to strengthen as it extinguishes the Chrysler-related debts.

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