COVID-19 Leads To Downgrades Of BMW And Daimler; Outlook On VW Now Negative

  • The COVID-19 pandemic has triggered a rapid decline in global auto demand, and we now envisage materially lower auto sales leading to intense pressure on automakers.
  • In response to the weaker demand, German automakers Volkswagen (VW), BMW, and Daimler have announced production shutdowns, and we expect their revenues and cash flow will take a hit in 2020 before market conditions recover next year.
  • We are lowering our long-term ratings on BMW and Daimler by one notch, while revising our outlook on VW to negative.
  • The negative outlooks indicate risks linked to the duration of the COVID-19 pandemic and its impact on the global auto industry and on the three automakers in particular.
MILAN (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took rating actions on three Germany-based automakers.
  • We lowered our long-term issuer credit ratings on BMW AG to 'A' from 'A+' and affirmed our 'A-1' short-term issuer credit ratings.
  • We also lowered our long-term issuer credit ratings on Daimler AG to 'BBB+' from 'A-' and affirmed our 'A-2' short-term issuer credit ratings.
  • We revised our outlook on Volkswagen AG (VW) to negative from stable and affirmed our 'BBB+/A-2' long- and short-term issuer credit ratings.
We expect all three entities to see a steep decline in revenue and cash flow this year due to weak demand, especially in Europe, as a result of the COVID-19 pandemic and restrictions imposed by governments to reduce contagion risk. We revised our global light-vehicle sales projections on March 23, 2020, and now expect a 15% decline in 2020 to less than 80 million units from 90.3 million in 2019, followed by a recovery in the 6%-7% range in 2021 (see "COVID-19 Will Batter Global Auto Sales And Credit Quality," published on RatingsDirect).
Based on our estimates, available liquidity at the three German auto manufacturers should allow them to cover the costs associated with a production shutdown of at least three months.

Daimler AG

In our revised base case, we forecast negative free cash flow of possibly €4 billion-€6 billion, owing to the significant drop in demand and that Daimler would need to absorb about €3 billion of cash outflows related to ongoing diesel proceedings, warranty issues, and cost restructuring efforts. We expect Daimler's suspension of most of its European production facilities for two weeks will only partly offset the decline, but its available liquidity sources offer headroom to cope with a potential production standstill in Europe of at least three months, even without additional measures or government support.
Outlook
The negative outlook primarily reflects the high degree of uncertainty regarding the economic impact of the COVID-19 pandemic and its implications for global car unit sales. We now expect Daimler to report substantially negative free operating cash flow (FOCF) of €4 billion-€6 billion in 2020 along with EBITDA margins of less than 6% in 2020, which recover to about 8% in 2021.
Downside scenario.  We could lower the ratings on Daimler if no longer foresee a rebound of credit metrics toward the end of 2020 or in 2021, when we expect market conditions to normalize. We could also lower the ratings should other operational setbacks materially hamper the group's operating and financial performance, such as significant supply chain disruptions, failure to catch up with carbon-dioxide emission targets, or slower-than-expected progress on cost-cutting plans.
Upside scenario.  We could revise the outlook to stable if market conditions and sales visibility improved in Daimler's key markets, including Europe and the U.S., coupled with a continued recovery in China.

BMW AG

We lowered our rating because the effects of the COVID-19 pandemic will likely result in lower-than-expected unit sales for BMW AG, and that production cuts will hurt the group's revenue and cash flow in 2020. Moreover, we expect that BMW's suspension of all European and South African production facilities for four weeks, intensified cost-savings initiatives, and focus on cash preservation won't be sufficient to fully offset the impact on its earnings. We expect production to resume early in the second quarter of 2020 in Europe and the U.S., but any delay could further pressure the group's credit metrics and liquidity. In our view, BMW's available liquidity sources offer headroom to cope with a production standstill of at least three months, even absent additional measures or government support.
Outlook
The negative outlook reflects our concern regarding the rapidly declining auto demand globally, and risk of production shutdowns extending beyond the four weeks announced by BMW. In our revised base-case scenario, we now expect BMW to report moderately negative FOCF in 2020 of up to €1.5 billion (including the payout on the cartel fine) along with an EBITDA margin of about 10% that recovers beyond 12% in 2021.
Downside scenario.  We could lower our rating if demand declines more steeply than we currently anticipate, resulting in lower revenues and cash flow, or if the group is forced to extend its production shutdowns beyond the time frame currently envisaged in our base case. We could also lower the rating should operational setbacks, such as significant supply chain disruptions, materially hamper the group's operating and financial performance, preventing its EBITDA margin from returning to more than 12% or FOCF increasing beyond €2 billion from 2021.
Upside scenario.  We could revise the outlook to stable if risks of a sustained economic downturn recedes and demand shows further signs of stabilization in China and begins to improve in Europe and the U.S.

Volkswagen AG

Following strong operating results in 2019, we envisage materially lower unit sales in 2020 and see a high risk that VW's current production shutdown, in Europe in particular, could last well beyond the two weeks VW initially planned. However, VW's available liquidity sources currently offer comfortable headroom to cope with a potential production standstill of at least three months, even absent additional measures or government support to safeguard liquidity.
Outlook
The negative outlook reflects our concerns regarding rapidly declining auto demand globally, and the risk of production shutdowns being extend well beyond the two weeks announced by VW for passenger cars. In our revised base case for VW in 2020, we observe rapidly fading headroom for credit metrics, with funds from operations to debt declining to 45%, compared with the 45%-50% range commensurate with the rating; and adjusted debt to EBITDA increasing to 1.8x from about 0.9x at year-end 2019, close to the 2.0x threshold for a downgrade. We also expect a material decline of the adjusted EBITDA margin to 9.2% and a material hit on cash flow generation before a recovery in 2021.
Downside scenario.   We could lower the ratings if we observed enduring pressure on margins after 2020, with adjusted EBITDA to revenue remaining well below 10%, for example due to VW's inability to meet its CO2 target in Europe, which would expose the group to potentially multi-billion euro fines in its main market.

Upside scenario.   We could revise the outlook to stable if production patterns returned to normal in the second half of 2020, in Europe in particular, where VW commands 25% of the market; and demonstrates its capacity to deliver on its environmental obligations in Europe.
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