Daimler-Benz and Units Rtgs Affmd by S&
11 March 1998
Daimler-Benz and Units Rtgs Affmd by S&P; Otlk Stable
LONDON, March 11 -- Standard & Poor's today affirmed its
single-'A'-plus issuer credit and senior unsecured long-term ratings and 'A-1'
short-term issuer credit and commercial paper ratings of Daimler-Benz AG
(Daimler) and related entities (see list below).
The affirmation follows today's announcement by Daimler-Benz of a special
pay-out of DM10.3 billion subject to the full cash pay-back of paid-out
retained earnings of DM 7.4 billion (US$4 billion) within a reasonable
time-frame. Standard & Poor's understands further, that the difference of
DM2.9 billion is a tax refund to the company from the German tax authorities,
which will be channeled through to the shareholders.
The rationale of the transaction is to unlock the differential between
the German corporate tax rate of 50% taxed on retained earnings in the 1980s
and 30% for distributed profits. The first step of the transaction will be
the pay-out and related decrease of retained earnings by DM7.4 million. As
the pay-out will be financed by liquid assets or debt, leverage will increase
for an interim period until reduced to previously levels by way of the
DM7.4 billion cash received from the pay-back of a subsequent capital
increase. Support for the rating's affirmation is linked to the expected
success of funding the full amount of the pay-out of retained earnings with
the capital increase.
The ratings of Daimler-Benz AG and its related entities reflect
Daimler-Benz's position as a leading producer of higher-priced, luxury
passenger cars, and its conservative financial profile, highlighted by cash
balances in excess of industrial debt.
Daimler continues to be supported by its excellent passenger car
operations translating into the automotive unit's ongoing strong profits and
cash flow. Earnings in the commercial vehicles business continue to be weak,
but are improving, while Daimler's strong geographical diversification in the
commercial vehicle business continues to shelter it from the cyclical sales
and earnings pattern typical to this industry. Past diversification efforts
have increased Daimler's presence in aerospace, defense, and rail systems,
though the financial performance of these businesses generally has been poor
in the recent years.
Standard & Poor's recognizes the rigorous restructuring measures taken by
the commercial aircraft business, which reduced the group's exposure to the
highly competitive and cyclical regional commercial aircraft industry.
Nevertheless, Daimler-Benz Aerospace (DASA) remains saddled with high German
labor costs, the disparity between its Deutschemark-denominated cost base and
its U.S. dollar-based revenues, and governmental budgetary pressures. As the
industry continues to consolidate, management will be challenged by the need
to reduce costs and enhance productivity. Currently the very favorable
US$/DM exchange rate supports DASA's earnings improvement, as does the
significant order increase from Airbus and the final approval from the German
government for the funding of DASA's production start-up costs for the
military aircraft Eurofighter.
Following substantial losses in 1995 -- largely reflecting restructuring
charges at DASA -- results improved significantly in 1996 and 1997. As all
four divisions saw a substantial increase in revenues, consolidated sales were
up by 19% to DM124 billion in 1997. Operating profit after depreciation under
U.S. GAAP -- including interest from customer advances and non-allocable R&D
costs -- grew to DM4.3 billion from DM2.4 billion in 1996. Earnings growth
was supported in particular by higher contribution from the commercials
vehicle and the aerospace business, whose positive results partially relate to
the more favorable US$ exchange rate environment. Funds from operations (FFO)
continued to improve in 1997. The 1996 FFO of DM6.9 billion covered the
company's industrial net debt position, including 100% of pension liabilities,
according to captive finance methodology.
OUTLOOK: Stable.
Standard & Poor's expects the passenger car business' strong performance
and cash flow generation to continue to shelter Daimler from volatility and
profitability pressures in its commercial vehicle, aerospace, and defense
activities. -- CreditWire
RATINGS AFFIRMED RATING
Daimler-Benz AG
Corporate Credit Rating A+/A-1
Commercial paper A-1
Daimler-Benz Finanz (Luxembourg) AG
(GTD: Daimler-Benz AG)
Senior unsecured debt A+
Daimler-Benz North America Corp.
(GTD: Daimler-Benz AG)
Corporate Credit Rating A+/A-1
Commercial Paper A-1
Daimler-Benz International Finance B.V.
(GTD: Daimler-Benz AG)
Senior unsecured debt A+
Daimler-Benz UK PLC
(GTD: Daimler-Benz AG)
Senior unsecured debt A+
Daimler-Benz Canada Inc.
(GTD: Daimler-Benz AG)
Senior unsecured debt A+
SOURCE Standard & Poor's CreditWire