(The following statement was released by the rating agency)
Sept 10 -
-- On Aug. 27, 2012, we revised our outlook on German auto manufacturer Volkswagen AG (VW) to positive from stable.
-- In our view, VW’s German subsidiary, MAN SE, has a satisfactory business risk profile and a modest financial risk profile.
-- We are revising our outlook on MAN to positive from stable and affirming the ‘A-/A-2’ long- and short-term corporate credit ratings.
-- The positive outlook reflects that on VW, in line with our parent-subsidiary criteria.
On Sept. 10, 2011, Standard & Poor’s Ratings Services revised its outlook on Germany-based industrial group MAN SE to positive from stable. At the same time, the ‘A-’ long-term and ‘A-2’ short-term corporate credit ratings were affirmed.
The ratings on MAN are underpinned by our view of its leading market positions in heavy trucks in Europe and South America, strong market positions in diesel engines and turbo machinery, ability to generate good free operating cash flow, and wide geographic diversity. They are tempered, however, by the capital intensity and pronounced cyclicality of MAN’s end markets, notably commercial vehicles, and challenging conditions in the bus industry. We view the group’s business risk profile as “satisfactory” and the financial risk profile as “modest” as our criteria define those terms.
Given Volkswagen’s controlling stake in MAN we apply a top-down approach to the rating on the subsidiary in line with our parent-subsidiary criteria. We assess MAN’s stand-alone credit profile at ‘bbb+'. The corporate credit ratings and outlook are capped by those on the parent, VW.
Due to slowing European and Brazilian truck markets, MAN reported weaker sales and considerably weaker profits in the first half of 2012. Although we had been expecting slower order intake and revenues on the back of slowing truck markets in 2012, the 38% drop in first-half operating profit, was somewhat higher than anticipated. Free operating cash flow was also negatively affected by equity investment in the company’s Indian subsidiary and the divestment of Ferrostaal.
Accordingly, in our base case, we now expect adjusted funds from operations (FFO) to debt of 35%-40% compared with our previous expectations of 45%-50% for full-year 2012. This compares with FFO to debt of 35% for the rolling 12 months to June 30, 2012 and 98% for full-year 2011. Although we see this as slightly on the low side for the ‘bbb+’ stand-alone credit profile, MAN has a proven track record of handling swings in the cycle.
We consider MAN’s liquidity to be “strong”, underpinned by cash and marketable securities of about EUR527 million as of June 30, 2012. The group has full availability under a EUR1.5 billion variable-rate revolving credit facility, which expires in December 2015. We understand that this facility has a change-of-control clause but no financial covenants or rating triggers.
The group’s liquidity position is also supported by a committed EUR300 million credit facility from the European Investment Bank, of which EUR300 million is currently drawn, and a further EUR0.4 billion of unused committed bilateral lines. Furthermore the group’s liquidity position is supported by uncommitted credit lines, a pan-European asset-backed security platform, and a U.K. operating lease securitization. MAN’s capacity to service its outstanding debt is further supported by our expectations of FFO of more than EUR1 billion yearly from 2012.
On June 30, 2012, maturities within 12 months stood at EUR1.46 billion. The group’s funding sources considerably exceed upcoming debt maturities in 2012 and 2013. MAN’s debt maturities in its financial services division are matched with the underlying assets.
The positive outlook on MAN reflects that on VW, in line with our parent-subsidiary criteria. Accordingly, we could revise the outlook on MAN if we were to revise that on VW.
A negative rating action on VW could trigger a similar action on MAN. Furthermore, VW’s strategic business decisions, such as those leading to closer cooperation between its Swedish subsidiary, Scania (publ.) AB, MAN, and its own truck division could affect MAN’s stand-alone credit profile.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Automaker Industry, Sept. 25, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Captive Finance Operations, April 17, 2007
-- Corporate Criteria--Parent/Subsidiary Links; General Principles; Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating Link To Parent, Oct. 28, 2004
Ratings Affirmed; Outlook Action
Corporate Credit Rating A-/Positive/A-2 A-/Stable/A-2
Senior Unsecured A-