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Related Issuers
Rating Action:

Moody's upgraded Volvo Car to Ba1; outlook stable

02 May 2018

Frankfurt am Main, May 02, 2018 -- Moody's Investors Service, ("Moody's") has today upgraded to Ba1 from Ba2 the corporate family rating (CFR) and to Ba1-PD from Ba2-PD the probability of default rating (PDR) of Volvo Car AB (Volvo Car). Concurrently, Moody's has upgraded to Ba1 from Ba2 Volvo Car's senior unsecured notes rating. The outlook on all ratings is stable.

RATINGS RATIONALE

"The upgrade of Volvo's ratings was driven by continued improvements in its operating performance and credit metrics and our expectation that this trend will continue in the current fiscal year founded by further successful new model launches," says Falk Frey, a Senior Vice President and lead analyst for Volvo Car.

Volvo Car's operating performance has further improved in 2017 based on continued unit sales increases (up 7.0% to 571,577 from 534,332 in 2016) driven by the strong demand for the 90 series as well as for the XC60 with the introduction of the new XC60 in the second quarter 2017. This resulted in revenue increases to SEK211 billion (+16.6%) in 2017 compared with SEK181 billion in 2016 and translated into a strongly improved reported operating income of SEK14 billion versus SEK11 billion in 2016.

These results translate into Moody's financial metrics of an EBITA margin improvement to 5.5% from 5.0% in 2016 and a gross leverage (Debt/EBITDA) of 1.9x compared with 2.1x in the previous year.

Moreover, Volvo Car's performance in the first quarter 2018 more or less confirms Moody's expectation of a continued positive trend in revenues and earnings based on the company's well received new model introductions. Volvo Car reported a net revenue increase of 18.9% in Q1 2018 compared to Q1 2017 to SEK56.8 billion driven by retail sales of 147,407 units (+14.1%). Reported operating income increased 3.6% to SEK3.6 billion from SEK3.5 billion in Q1 2017.

Moody's anticipates the positive trend in unit sales and revenues to continue based on the full year availability of the XC60 as well as the introduction of the XC40, Volvo's first SUV in the compact segment. In addition the two last models on the SPA platform the V60 which has been launched and is currently being ramped-up and the S60 which will be launched this year will result in additional scale effects (adding to the XC90, S90, V90 and XC60 models) on this platform and further profit improvements.

The upgrade also assumes a continued conservative financial policy, as shown in the past, despite the increasing debt load at the level of Geely Group, that resulted from the purchase of meaningful participations in AB Volvo, Saxo Bank as well as Daimler AG.

LIQUIDITY

Volvo Car's liquidity profile is very good, underpinned by (1) cash and cash equivalents, including marketable securities (after a 20% haircut), on the balance sheet of SEK31.4 billion as of 31 March 2018, (2) expected balanced free cash flow in the next 12 months and (3) access to a EUR1.3 billion (approximately SEK15.9 billion, unrated) back up facility (maturing in June 2022). The company had sizable headroom under its financial covenants as of 31 March 2018. The company's existing resources would be sufficient to cover its corporate cash requirements over the next 12 months including sustained high levels of capital expenditures, intra year working capital needs and potential dividend payments.

RATING OUTLOOK

The stable outlook is based on our expectation that the renewal programme and subsequent sales and earnings growth will lead to a further improvement in Volvo Car's credit metrics, which will position it comfortably in the current rating category.

The stable outlook further reflects Moody's expectation that Volvo Car's business setup has the capacity to contend with the long-term cyclicality within the global passenger vehicle markets and its challenging landscape as a result of heavy investment requirements for (1) alternative propulsion technologies; (2) driverless vehicles; (3) the shift of production capacities towards alternative fuel vehicles; (4) connectivity as well as (5) regulations relating to vehicle safety, emissions and fuel economy.

What Could Change the Ratings DOWN/UP

Moody's could consider upgrading Volvo Car's ratings to Baa3 in case of (1) evidence that the recent new model introductions (XC90, S90, V90, XC60, XC40) remain a sustained success and positively contribute to Volvo's diversification of profit and cash flow generation; (2) visibility that Volvo's profitability based on an adjusted EBITA margin can exceed and sustainably remain above 7.0%; (3) a continued Moody's-adjusted leverage ratio below 2.0x; (4) its ability to generate positive free cash flows despite the high investment spending as anticipated for the coming years and (5) the maintenance of a prudent financial policy that includes low debt leverage and a solid liquidity profile on a sustained basis against the backdrop of its parent company's corporate activities.

Volvo Car's rating could come under pressure in case of (1) the company's EBITA margin to remain below 5.5% for a sustained period of time (2) a deterioration of Volvo's free cash flow generation to become materially negative for some time (3) an increase in its Moody's-adjusted leverage ratio approaching 3.0x as well as (4) a material change in the conservative financial policy e.g. high dividend payouts, sizable acquisitions.

COMPANY PROFILE

Headquartered in Gothenburg, Sweden, Volvo Car is a premium manufacturer of passenger cars. The company produces and markets sedans ('S' series), station wagons ('V' series) and SUV ('XC' series) vehicles under the Volvo brand. In the full year 2017, Volvo sold 571,577 vehicles through 2,300 dealers mostly across Europe, the US and Asia. The company generated approximately SEK211 billion in revenue and SEK14 billion in reported operating income in 2017 (including the full contribution from the company's 50%-owned Chinese subsidiaries).

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Automobile Manufacturer Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

Upgrades:

..Issuer: Volvo Car AB

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

.... Backed Senior Unsecured MTN Upgraded to (P)Ba1 from (P)Ba2

.... Backed Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

Outlook Actions:

..Issuer: Volvo Car AB

....Outlook, Remains Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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