MOODY'S ASSIGNS A3 LONG TERM RATING TO GUARANTEED SUBSIDIARIES OF AB VOLVO; OUTLOOK POSITIVE
Moody's Investors Service assigned an A3 long term rating to the guaranteed subsidiaries AB Volvo (Volvo) including, Volvo Group Finance Sweden AB, Volvo Group Treasury Asia Ltd. and Volvo Group Treasury North America Inc. Moody's rating is based on the diversity of the company's businesses, its high liquidity, and its cash flow generating ability. The rating also considers Volvo's strong brand identity and its technological strengths. Moody's rating assignment also considers the potential implications of Volvo's relatively small volumes in the overall passenger car market, the growth of its sales financing activities and the company's interest in expansion of its businesses through acquisition. Moody's short term rating of Prime-2 for Volvo remains unchanged.
Volvo has been traditionally active in the luxury passenger car and heavy truck markets. Since 1995, the company has expanded into construction equipment, which has rapidly become its third highest contributor to earnings. Volvo also produces buses, marine and industrial engines, and aircraft engines. While smaller contributors to earnings and cash flow, these have been steady performing divisions over the past five years, partially offsetting the volatility experienced in some of Volvo's larger operations, such as heavy trucks. While all of Volvo's business lines are cyclical, the timing of downturns within the different segments do not always coincide, providing more stability to financial results than would otherwise occur.
Volvo has nearly completed an asset divestiture program that has increased its liquidity. With SKR17.7 billion in cash and marketable securities in its industrial related operations (excludes sales financing) compared to SKR4.8 billion in industrial related debt, Volvo has the financial flexibility to maintain its competitive position during a downturn in the auto or heavy truck markets. The continued maintenance of high liquidity is important to Volvo's rating outlook.
With the development of new product lines after the termination of merger discussions with Renault in 1993, Volvo's earnings and cash flow have improved. While near term earnings are likely to be dampened by lower sales to emerging markets, management is committed to focusing on continued cost control in an attempt to offset such impacts on its financial performance. An important part of this cost control is management's strategy to divest operations, or combine with other producers or suppliers in joint ventures, where the company cannot attain sufficient scale on its own.
Volvo is a low-volume producer of passenger cars relative to the overall industry, though a strong brand strategy has provided it a meaningful position in the lower luxury segment. With increasing expansion by larger global players into all segments of the passenger car market combined with the increasing use of common components across segments, Volvo's relative size will provide continuing challenges to its competitive position. This is a constraining factor in Volvo's rating.
Moody's anticipates that Volvo management will seek to grow through acquisitions in its core business, particularly in construction equipment and commercial vehicles. Management has been actively acquiring both small (such as Mexicana de Autobuses) and medium sized companies (such as the recent acquisition of the construction equipment division of Samsung Heavy Industries for approximately SEK 4.5 billion). Moody's expects continued acquisitions by Volvo in the future. The potential impact of such activity on Volvo's financial posture is a constraint on its rating.
Volvo is expanding its sales financing operation, particularly in its passenger car activities. The increased residual risks in lease assets and credit risk in both lease and installment receivables attendant with higher volumes increases the potential capital requirements on the company. Moody's views sales financing as an important core activity for any auto or truck manufacturer. Volvo's approach to risks in its sales financing operation appear conservative relative to industry standards. Continued management of these risks is an important rating consideration.
The following debt issues or programs were assigned A3:
US$ 1,000,000,000 Euro Medium Term Note Program available to Volvo Group Finance Sweden AB, Volvo Group Treasury Asia Ltd., and Volvo Group Treasury North America Inc. and guaranteed by AB Volvo (publ).
Volvo Group Finance Sweden AB eurodollar, Yen, Krona, and French Franc notes and bonds guaranteed by AB Volvo (publ).
Volvo, headquartered in Goteborg, Sweden, is the largest industrial company in Sweden.
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