(The following statement was released by the rating agency)
Dec 13 -
Summary analysis -- BMW AG ---------------------------------------- 13-Dec-2012
CREDIT RATING: A/Stable/A-1 Country: Germany
Primary SIC: Motor vehicles
and car bodies
Credit Rating History:
Local currency Foreign currency
16-Apr-2012 A/A-1 A/A-1
13-Nov-2009 A-/A-2 A-/A-2
05-Nov-2008 A/A-1 A/A-1
The ratings on Germany-based premium automaker BMW AG reflect Standard & Poor’s Ratings Services’ view of the group’s “strong” business risk profile and “modest” financial risk profile. The strong business risk profile is supported by BMW’s competitive position in the luxury segment, global brand recognition, and diversified geographic operations. These strengths are partially offset by BMW’s limited product diversification, given its focus on luxury autos; as well as its earnings volatility and the cyclical demand for cars. The modest financial risk profile is supported by BMW’s conservative financial policy, in our view, and its historically robust cash flow generation.
S&P base-case operating scenario
We think BMW will likely report a low-double-digit increase in unit sales in 2012, following the reported 10.1% advance in the first eleven months of the year. Under our base-case scenario for this year, we continue to assume that BMW will generate a minimal increase in sales with respect to 2011 figures in the eurozone (European Economic and Monetary Union), owing to sluggish economic and market conditions. In other large markets, such as China and North America, growth in demand has stayed strong, exceeding our previous expectations. Still, we believe that BMW should be able to attain an operating margin of about 10% in 2012. Among peers, BMW’s product portfolio had the lowest average age at the time of writing. We believe that this supports BMW’s sales, but this advantage will gradually disappear, given the general duration of the product lifecycle in the industry. However, due to its larger product range and the increasing number of product derivatives, BMW will probably maintain the age of its product portfolio below the average in recent years.We see the ongoing rapid increase in unit sales of premium cars in China as an opportunity for premium carmakers in the coming years. At the same time, though, the longer-term risk of political intervention in China could reshape the country’s car industry.
S&P base-case cash flow and capital-structure scenario
At year-end 2011, adjusted industrial debt was reduced to zero. This arose not only from the improvement in the group’s results, but also from the twofold impact of the acquisition of ICL (a leasing company) and a change in the company’s accounting policy for leased vehicles, and factoring in our adjustments under our captive finance policy. Based on our adjustments last year, we think industrial debt will likely remain at zero in 2012, barring any unforeseen changes we would take into account under our captive finance methodology at the end of the year.
For 2012, we think BMW will generate about EUR3 billion of free operating cash flow and maintain its ratio of funds from operations (FFO) to debt (as adjusted by Standard & Poor‘s) in the triple digits, well above the 50%-60% target. We also think that BMW will keep its dividend payout at about 30%-40%. BMW has indicated it plans to gradually achieve a 40% payout, provided that it generates extremely solid operating performance and cash. We don’t factor in any significant acquisitions in 2012 and beyond.
The short-term rating on BMW is ‘A-1’. We view the group’s liquidity as“strong” under our criteria. The coverage ratio of sources to uses in the next 12 months for the automotive division is above 2x. BMW’s financial flexibility and liquidity are underpinned by: Reported cash and cash equivalents of EUR6.9 billion in the industrial division on Sept. 30, 2012. Of this, we view EUR2 billion as tied to operations and therefore exclude this amount from our calculation. Short-term maturities in the industrial division were EUR2.5 billion on the same date. Unused group credit lines, notably a EUR6 billion committed syndicated bank line for general corporate purposes that backs up a multicurrency commercial paper (CP) program due in 2016. This credit line is free from financial covenants and material adverse change clauses. We assume this credit line is collateral for the outstanding CP under the CP program comprising a $7 billion U.S. program, a EUR5 billion European program, and a EUR2 billion French program. At the end of March 2012, BMW’s CP usage was at about EUR2.5 billion. Reasonable prospects for access to long-term debt, given BMW’s placements of public bonds. The group continued to be able to issue in the 2008-2009 global slowdown.
The financial services division’s funding, which should support business growth. The division addresses liquidity risk largely through matched refinancing (by duration and currency). The duration of liabilities is usually longer than the duration of assets. This division’s capital market funding mix remained in our view robust throughout the difficult funding environment in 2009. Debt in this division encompasses a wide variety of funding instruments, including customer deposits. BMW’s ability to generate a substantial amount of cash, and our expectation that the automotive division will continue to do so. As an example, BMW continued to generate cash amounts even in the 2008-2009 crisis and downturn in the global auto sector.
The stable outlook reflects our expectation that in 2012 BMW should be able to maintain EBIT in its automotive division at about 10% and FFO to debt well above our target range. Over the cycle, we believe that BMW should be able to maintain EBIT margin in the automotive division in the 8%-10% range and adjusted FFO to debt at least in the 50%-60% bracket, while continuing to generate significant free operating cash flow. Because of its solid financial profile, we believe that BMW has sufficient headroom to cope with a mild stress scenario, which might stem from prolonged economic weakness in Europe and a marked slowdown in the largest non-European economies where BMW is present.
We would revise the outlook to negative or consider a downgrade if BMW’s automotive EBIT margin unexpectedly contracted to significantly below the 8%-10% range, if the group failed to maintain its solid, positive free operating cash flow in the industrial division, or if its financial policy became more aggressive. A shift in policy could occur, for instance, through a substantial increase in dividends beyond what BMW has already announced or if the group made acquisitions.
We consider an upgrade to be unlikely at this stage.
Related Criteria And Research
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-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012