S&P Affirms Daimler Ratings
13 May 1998
S&P Affirms Daimler Ratings
LONDON, May 13 -- Standard & Poor's today affirmed its
single-'A'-plus corporate credit and senior unsecured ratings of Daimler-Benz
AG (Daimler) and related entities and affirmed its 'A-1' commercial paper
rating. The outlook is stable. The corporate credit and senior unsecured
debt ratings are removed from CreditWatch, where they were placed with
negative implications on May 6, 1998 following the confirmation of merger
discussions with Chrysler Corp.
At the same time, the single-'A' corporate credit and senior unsecured
ratings of Chrysler Corp. (Chrysler) and related entities remain on
CreditWatch with positive implications. The ratings of Chrysler will
ultimately be equalized with the ratings of Daimler should the merger be
concluded as presently envisaged. This is expected to occur by year-end 1998.
The affirmation of Daimler-Benz AG's ratings reflects its position as a
leading producer of higher-priced, luxury passenger cars, and the fact that
its business position will benefit from the merger with Chrysler. The merger
will be conducted through a noncash stock swap transaction, in which the
stockholders of both companies would exchange their existing equity for a
stake in DaimlerChrysler AG (DaimlerChrysler). Standard & Poor's expects the
new entity to maintain a conservative financial policy, and to continue to
cushion cyclicality by maintaining a significant net cash position.
Further, the business risk of the DaimlerChrysler AG should improve
through:
-- Higher reliance of DaimlerChrysler's sales, earnings, and cash flow on
the light vehicle manufacturing business, which in recent years has had better
financial performance than that of its less profitable nonautomotive
manufacturing businesses. The latter will now account for only about 15% of
consolidated sales;
-- Improved geographical diversification, with 55% of sales in North
America and 37% in Western Europe. As demand cycles in these two regions tend
not to move in unison, such regional mix is expected to lead to a greater
protection against the industry's inherent cyclicality; and
-- Leading business positions in such light vehicle market segments as
luxury passenger cars, minivans, and sport utility vehicles -- offering
relatively high margins compared with the other market segments.
Although the brands of these two profitable companies will continue to be kept
separate, the gradual integration of their automotive operations is expected
to provide meaningful financial benefits over the medium term,
including:
-- Savings from a pooled higher annual purchase volume for raw materials,
advertisement, and other;
-- Additional revenue enhancement, particularly from higher sales of
Chrysler products in Asia through the existing Daimler dealer network; and
-- Savings from combined component development and harmonization, which
could materialize once jointly developed models are introduced.
Standard & Poor's assumes that Daimler will move ahead with its
previously announced tax-driven special dividend pay-out of retained earnings,
with a full pay-back by a subsequent capital increase within a reasonable time
frame.
OUTLOOK: STABLE
Standard & Poor's expects the enlarged light vehicle business to continue
to support the current Daimler-Benz ratings. Although management has stated
its intent to maintain its investments in all business areas of
DaimlerChrysler, further reorganization of the business portfolio could, in
light of the expected consolidation of the European aerospace and defense
industry, materialize in time. Such developments remain uncertain, in light
of political factors, and would not likely have a material impact on
DaimlerChrysler's credit profile, Standard & Poor's said. -- CreditWire
SOURCE Standard & Poor's CreditWire