DBRS Downgrades DaimlerChrysler Financial Services Americas LLC to CCC, Trend Negative

DBRS has today downgraded the ratings of DaimlerChrysler Financial Americas LLC (Chrysler Financial or the Company), including the Issuer Rating to CCC from B (high). The trend on all ratings remains Negative.

The rating action reflects DBRS’s concerns regarding the mounting pressures on the Company’s operations resulting from the industry-wide decline in automotive sales, the weakened U.S. economic environment, the significantly weakened used-vehicle market, the increased cost of funds and the Company’s reliance on a deteriorating sister company, Chrysler LLC. (DBRS also downgraded Chrysler LLC to CC with a Negative trend today. (See separate press release). Moreover, given the size and scale of the issues that the Company faces, and the deteriorating economic climate, in DBRS’s view, the prospects for a near-term recovery are diminishing.

Chrysler Financial continues to be significantly impacted by the current environment. Credit and funding costs have increased dramatically while the ongoing market disruption has limited funding options and availability. Although Chrysler Financial successfully renewed the majority of its conduits earlier this year, the increased funding costs of the facilities have pressured operating margins at a time when revenues are being challenged by higher credit costs, lease impairments and reduced new-business volumes. Furthermore, scheduled reductions in the facilities along with reduced renewals have pressured funding availability. Given the current market conditions and the Company specific challenges, DBRS believes the Company’s ability to secure additional funding is limited.

The weak used-vehicle market has led to increased lease impairments and reduced recoveries for off-lease and repossessed vehicles. Wholesale prices for used large cars, SUVs and trucks continue to soften as consumer preference migrates towards smaller vehicles. Given the concentration of large vehicles in the Company’s retail loan and lease portfolio, DBRS expects continued heightened losses in the loan portfolio, as well as a significant weakness in residual values in the lease book. The large number of leases scheduled to mature in the next 12 months further intensifies this concern.

Moreover, the performance of the loan book has weakened, owing to the economic environment. Credit performance of the retail book has deteriorated, causing a surge in credit costs. Loss frequency has increased and is expected to remain high, given the expectation of a prolonged economic slowdown, while higher loss severities reduce recoveries. Furthermore, the reduced sales volumes at Chrysler LLC have undoubtedly pressured the finances of the dealer base; as such, DBRS expects increasing credit costs in the wholesale portfolio. Although this portfolio has traditionally been well managed, any increases in losses from the Company’s historically low levels will have a negative impact on credit costs. The continuing decline in demand for certain Chrysler products further exacerbates the risk that dealers will become increasingly more pressured.

The Negative trend reflects the DBRS view that Chrysler Financial’s business fundamentals will remain strained for the foreseeable future. Given the outlook for a significant and more prolonged downturn in the U.S. economy, weakening U.S. employment market and ongoing de-leveraging of the U.S. consumers’ balance sheets, DBRS does not anticipate an early recovery in auto sales nor does DBRS envision material near-term relief of the issues discussed above. DBRS considers liquidity risk elevated; as such, any meaningful reduction in funding will further pressure ratings. Furthermore, additional stress to the balance sheet may impact the recovery on the secured facilities, thereby altering the notching between the issuer and secured ratings.

Note:
All figures are in U.S. dollars unless otherwise noted.

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