TRATON Finance Luxembourg S.A. — Moody’s assigns (P)Baa1 ratings to TRATON’s new EMTN programme

Rating Action: Moody’s assigns (P)Baa1 ratings to TRATON’s new EMTN programmeGlobal Credit Research – 12 Mar 2021Frankfurt am Main, March 12, 2021 — Moody’s Investors Service (« Moody’s ») has today assigned a (P)Baa1 rating on the new E12 billion senior unsecured debt issuance programme of TRATON SE (TRATON) and its finance subsidiary TRATON Finance Luxembourg S.A. (TFL). Concurrently, Moody’s has affirmed TRATON’s Baa1 issuer rating. The outlook on the ratings is negativeA full list of affected ratings can be found at the end of this press release.RATINGS RATIONALEThe provisional (P)Baa1 rating on the debt issuance programme is aligned with TRATON’s issuer rating. Notes issued by TFL under the programme will be unconditionally and irrevocably guaranteed by TRATON. The notes will be structurally subordinated relatively to existing pension liabilities, operating liabilities and financial debt at the level of the main operating subsidiaries Scania, MAN Trucks & Bus and VWCO. With the implementation of the debt issuance programme, however, we expect the funding of TRATON’s industrial debt to be centralized at the holding level, with exceptions being limited to primarily local currency funding at the level of Scania and VWCO. After the acquisition of Navistar International Corp (Navistar) and an envisaged refinancing, we expect around 90% of TRATON’s industrial debt to be located at the parent company, and the remainder being equally split between Scania and VWCO.TRATON’s Baa1 rating reflects (i) the group’s strong market positions in Europe and South America in the heavy-duty truck segment, (ii) the expectation of profitability improvements driven by a sizable synergy potential between the group brands and restructuring measures at its MAN Trucks & Bus subsidiary, (iii) a solid liquidity profile, (iv) the company’s commitment to preserve a capital structure in line with the requirements for a solid investment grade rating, as well as (v) the ownership and assumed support from its main shareholder Volkswagen Aktiengesellschaft (A3 negative), which is committed to remain a major shareholder going forward.We expect the group’s net debt to EBITDA to remain below 2.0x on a stand-alone basis (i.e. excluding any impact from the pending acquisition of Navistar International Corp. (B2 stable)) even in a scenario of weaker operating performance because of a continued focus on debt repayment and supported by stringent financial policies.The rating negatively incorporates the cyclical nature of truck market demand, which is likely to weigh on operating performance also in 2021 and the group’s focus on medium- and heavy-duty trucks and buses with no other diversifying business operations. We note that the group’s operating profitability is weaker than that of some key peers, but we consider the group’s clear objective of better integrating its MAN and Scania activities, which should help to gradually strengthen its operating margins towards the high single digits in percentage terms (i.e. EBITA margin as defined by Moody’s).The truck market downturn brought on by the coronavirus will cause a pronounced weakening in TRATON’s credit metrics. In 2020, TRATON’s revenues declined 16% to E22.6 billion, and its operating profit margin dropped to only around 1% (Moody’s adjusted EBITA), compared with 7.6% in 2019. However, the company should be able to restore its metrics to appropriate levels by 2022 because the restructuring of MAN Trucks and Bus has been agreed with workers unions recently, the industry is showing signs of recovery and TRATON has ample liquidity to bridge a prolonged downturn. Moody’s view is also supported by TRATON’s expectation of a sharp increase in unit sales, substantial increase in sales revenues and its forecast of 5.0% to 6.0% operating return on sales in 2021 (before restructuring and effects of the Navistar takeover).On November 10, 2020, TRATON provided details on the binding agreement to acquire Navistar, the fourth largest truckmaker in the US. Moody’s considers the transaction, which is expected to be closed by mid-2021, to be strategically sound. The closing, however, is still subject to regulatory approvals and customary closing conditions. The purchase price of $3.7 billion (equity value for 83.2%) plus assumed debt of around $5 billion (Moody’s adjusted, as of end October 2020) will likely result in a re-leveraging of TRATON’s balance sheet. TRATON has not publicly communicated its refinancing plan. However, if fully debt funded, we expect TRATON’s debt / EBITDA (Moody’s adjusted) to slightly exceed 3x in 2021 before declining towards 2x in 2022.OUTLOOKThe negative outlook reflects the negative impact that the pandemic and the cyclical downturn in the truck market have on TRATON’s operating performance and credit metrics into 2022. After a drop of 21% in TRATON’s unit sales in 2020, we expect for 2021 industry unit sales and TRATON’s volumes to rebound and grow by about 10-15%. The acquisition of Navistar will increase TRATON’s debt/EBITDA, and the negative outlook reflects the risk that TRATON might be unable to de-lever sustainably to a maximum of 2x debt/EBITDA (Moody’s adjusted), Moody’s expects for the Baa1.Moreover, future demand for vehicles could be weaker than our current estimates, the already competitive environment in the auto sector could intensify further, and TRATON could encounter greater headwinds than currently anticipated in the recovery of its credit metrics.LIQUIDITYTRATON’s liquidity position is excellent and allows it to fund sizable cash requirements that might arise under a potentially extended downturn in the global truck market as a result of the coronavirus pandemic. As of 31 December 2020, the group’s sources of cash included cash and marketable securities of around E3.8 billion as well as an undrawn E3.75 billion revolving credit facility (maturing in 2023, with two one-year extension options). In March 2021, TRATON also signed a E700 million Schuldscheindarlehen. Together with FFO estimated at around E2.8 billion over the next twelve months, total cash sources amount to slightly more than E11 billion.These sources cover of uses totaling to nearly E11 billion. Large upcoming debt repayments (around E6 billion) are due to a significant degree from group’s financial services segment included in our liquidity analysis. Moreover, TRATON repaid in March E1 billion of shareholder loans to Volkswagen. Further cash uses relate to working cash of around E1 billion, capex of around E1.5 billion and potential working capital outflows of around E1 billion.For the proposed acquisition of Navistar, TRATON has secured a fully committed financing of about $3.7 billion equivalent, which covers the equity purchase price. As a result, the closing of the transaction should not negatively impact TRATON’s liquidity profile.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSTRATON’s ratings could be downgraded in case of (1) inability to realize identified synergies within the Group’s truck brands resulting in profitability below expectations, (2) EBITA margin sustainably below 6%, (3) leverage (Debt/EBITDA) remaining sustainably above 2.0x, (4) a weakening liquidity profile as well as (5) a negative Free Cash Flow generation.Although an upgrade within the next 24 months is not likely, Moody’s would consider upgrading the rating in case of (1) improving the longer-term returns for the MAN and VWCO truck brands; (2) EBITA margin of around 8% through the cycle; (3) positive Free Cash Flow on a sustainable basis; (4) Debt/EBITDA consistently below 1.5x; as well as (5) evidence of a track record of conservative financial policy and a strong liquidity profile.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.LIST OF AFFECTED RATINGS:Assignments:..Issuer: TRATON Finance Luxembourg S.A…..Backed Senior Unsecured Medium-Term Note Program, Assigned (P)Baa1..Issuer: TRATON SE….Senior Unsecured Medium-Term Note Program, Assigned (P)Baa1Affirmations:..Issuer: TRATON SE…. LT Issuer Rating, Affirmed Baa1Outlook Actions:..Issuer: TRATON Finance Luxembourg S.A…..Outlook, Assigned Negative..Issuer: TRATON SE….Outlook, Remains NegativeCOMPANY PROFILEHeadquartered in Munich, Germany, TRATON SE (TRATON) is one of the world’s largest manufacturer of medium- and heavy-duty trucks and buses sold under its strong brands Scania, MAN and VWCO. Moreover, TRATON offers customer financing solutions through its Scania financial services business.During the year 2020, TRATON’s Industrial business (excl. financial services) generated revenues of E22.6 billion and a company-adjusted operating profit of E135 million. TRATON is listed on the Frankfurt and Stockholm stock exchange since its IPO in June 2019, with Volkswagen Aktiengesellschaft remaining its major shareholder with around 89.7% of TRATON’s shares.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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