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Rating Action:

Moody's downgrades AB Volvo to Baa2/P-2 with a stable outlook

24 Jul 2009

Approximately SEK 167 Billion of Debt Affected

Frankfurt, July 24, 2009 -- Moody's Investors Service today downgraded AB Volvo's (Volvo) long term ratings to Baa2 from Baa1. The Prime-2 short-term ratings remain unchanged. The outlook is now stable.

Falk Frey, Senior Vice President and the lead analyst at Moody's for the European automotive sector, said: "the downgrade was triggered by the weaker operating and cash flow performance of Volvo in Q2 2009 than anticipated by the agency leading to a high likelihood that the recovery of credit metrics will be more protracted than previously expected. However, various initiatives undertaken within the last six months to improve its liquidity profile and reduce its cost base provide some comfort that Volvo can withstand a more extended downcycle within the current rating category which has been reflected in the stable outlook." Frey went on to say:" the stable outlook also considers Volvo's solid business and unchanged strong competitive position that has not deteriorated over the last quarters."

In the second quarter 2009, Volvo reported a decrease in net sales of 34% to SEK 54.0 billion compared to the second quarter 2008. Adjusted for currency fluctuations, net sales declined by 45%. Demand in all regions declined with Europe -44%, North America -29%, Asia -14%, South America -25%. As a result of sharply lower sales, low capacity utilisation and the timelag to adjust the cost structure to lower volumes Volvo reported a first quarter operating loss of SEK 6.9 billion leading to a total loss of SEK 11.4 billion for the first half year 2009. All of Volvo's largest divisions Trucks, Construction Equipment, Buses and Customer Finance reported a negative operating income for both the first and second quarter. In addition, Volvo reported a negative operating cash flow of SEK 2.9 billion improving from a negative SEK 15.7 billion in Q1 2009. Cash resulting from a reduction in inventories by SEK 5.8 billion was mitigated by lower payables. With negative operating cash flow after the first six months 2009 amounting to SEK 18.6 billion Moody's does no longer anticipate the company to be able to generate a positive cash flow for the full fiscal year 2009 a key assumption to keep the Baa1 rating.

Volvo has confirmed its market expectations for heavy truck demand in its key markets published in its Q1 results report. The company anticipates demand for heavy trucks in Europe to decline by more than 50%, in North America by 30-40% and in Japan by 40%.

However, construction equipment market expectations for North America have been revised downwards to a decline of 30-40% compared to 25-30% anticipated previously. Expectations for Europe and the rest of the world remain unchanged, down by 40-50% and 30-40% respectively. The agency also expects that the cost adjustments made by the company will have their full effect in the year 2010, and thereby contributing to a recovery of profitability.

Though not currently anticipated by the agency, Volvo's Baa2 ratings could come under pressure should market demand in the company's key markets turn out to be even worse than its revised expectations for the current year as published in the second quarter report. The ratings could also be downgraded in case of (i) lack of clear path of recovery in the key credit metrics in 2010 compared to 2009 expected at this point as a result of the adjustments of Volvo's cost base and an improved capacity utilisation driven by a higher demand in North America evidenced by an EBIT margin around 3.0% and Debt/EBITDA moving towards 4.0x as well as (iii) an improved asset performance of Volvo Financial Services and (iv) lower credit losses. In contrast the outlook could be raised to positive in case of visibility to achieve (i) interest cover ratio of more than 3.0x in 2010.

Volvo's Baa2 rating continues to benefit from (i) its strong market positions which have not been impaired in 2008 and H1 2009 in its key business segments, (ii) synergy potential from being the second largest heavy duty engine producer (iii) a geographical diversified revenue base as well as (iv) revenues from services and the aftermarket business which should be more stable and of good profitability.

Moody's also notes that Volvo has taken various actions to improve its liquidity profile in the last months including the arrangement of an additional credit facility of €775 million as well as accessing the bond markets aiming to lengthen its debt maturity profile. In Moody's stress case scenario, where access to debt markets is assumed to be closed for 12 months and maturing finance assets are replaced, the company's available cash sources and committed bank lines should be sufficient to cover the potential needs arising from debt maturities, capital expenditures as well as day to day needs and dividend payments, dependent on the magnitude of working capital that can be released over the course of the next 12 months.

Downgrades:

..Issuer: AB Volvo

....Issuer Rating, Downgraded to Baa2 from Baa1

..Issuer: Volvo Treasury AB

....Senior Unsecured Medium-Term Note Program, Downgraded to Baa2 from Baa1

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1

..Issuer: Volvo Treasury Australia Pty Ltd

....Senior Unsecured Medium-Term Note Program, Downgraded to Baa2 from Baa1

Outlook Actions:

..Issuer: AB Volvo

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury AB

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury Australia Pty Ltd

....Outlook, Changed To Stable From Negative

..Issuer: Volvo Treasury North America LP

....Outlook, Changed To Stable From Negative

Volvo's ratings were assigned by evaluating factors we believe are relevant to the credit profile of the issuer, such as i) the business risk and competitive position of the company versus others within the industry, ii) the capital structure and financial risk of the company, iii) the projected performance of the company over the near to intermediate term, and iv) management's track record and tolerance for risk. These attributes were compared against other issuers both within and outside of Volvo's core industry and Volvo's ratings are believed to be comparable to those of other issuers of similar credit risk.

Moody's last rating action on Volvo was a change in the outlook to negative from stable of the company's Baa1 long term ratings on April 30th 2009.

Headquartered in Gothenburg, Sweden, AB Volvo is a manufacturer of trucks, buses and construction equipment, drive systems for marine and industrial applications, and aerospace components. Moreover, Volvo's financial services operation provides complete solutions for financing and service. Volvo is the largest European heavy truck manufacturer and ranks second worldwide. In 2008 the company delivered 251,150 trucks and generated Group revenues of SEK295 billion in its industrial operations.

Frankfurt
Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades AB Volvo to Baa2/P-2 with a stable outlook
No Related Data.
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