TRATON Finance Luxembourg S.A. -- Moody's downgrades TRATON's ratings to Baa2, outlook stable

Rating Action: Moody's downgrades TRATON's ratings to Baa2, outlook stableGlobal Credit Research - 29 Mar 2022Frankfurt am Main, March 29, 2022 -- Moody's Investors Service ("Moody's") has today downgraded the issuer rating of TRATON SE (TRATON) to Baa2 from Baa1. Concurrently, Moody's has downgraded the rating of TRATON's senior unsecured debt issuance programme to (P)Baa2 from (P)Baa1 and the senior unsecured ratings issued by TRATON's finance subsidiary TRATON Finance Luxembourg S.A. (TFL). The outlook on the ratings changed to stable from negative.A full list of affected ratings can be found at the end of this press release."The downgrade reflects the expectation that TRATON's leverage will remain elevated following the debt-financed acquisition of Navistar and in light of the increasingly likely payment of the EU antitrust fine", said Matthias Heck, a Moody's Vice President -Senior Credit Officer and Lead Analyst for TRATON. "The company's plans to strengthen its capital structure have not been realized so far and execution risks have increased in an increasingly difficult macroeconomic and capital market environment", added Mr. Heck.RATINGS RATIONALEIn 2021, TRATON's industrial debt (Moody's adjusted, including pensions) increased to €11.5 billion from €5.5 billion at the end of 2020. The increase was mainly driven by the acquisition of Navistar (€5.9 billion purchase price plus net debt acquired), the squeeze-out of minority shareholders at MAN (€587 million), and a provision for EU antitrust proceedings (€881 million), which Moody's considers as debt, since the General Court of the European Union dismissed TRATON's appeal against the fine in February 2022. TRATON's positive industrial net cash flow of approximately €500 million (after restructuring cost) in 2021 and the use of approximately €2 billion marketable securities and cash on hand avoided a more meaningful debt increase.On a Moody's adjusted basis, TRATON's debt/EBITDA increased to 3.8x at the end of 2021, from 2.4x at the end of 2020. This increase in leverage was limited by a material improvement of TRATON's EBITDA (Moody's adjusted) to €3.0 billion in 2021 from €2.3 billion in 2020. For 2022, Moody's expects a de-leveraging towards 2.5x and for 2023 towards 2.0x, which remains, however, elevated and more commensurate with a Baa2. The de-leveraging is driven by the absence of one-off cost for litigation and restructuring recorded in 2021 (€1.2 billion in total), the full consolidation of Navistar, benefits from the restructuring at MAN, and increased volumes.The macroeconomic environment has deteriorated with Russia's invasion of Ukraine. As a result, Moody's lowered its global GDP growth expectation by 0.7% to now 3.6% for 2022 (see Moody's March 2022 Update). While the lower growth could also lead to a generally weakening demand in TRATON's end markets, MAN's production facilities in Europe have faced some disruption of parts supplies from the Ukraine. The company's direct exposure to Russia and the Ukraine in terms of unit sales and revenues was below 5% in 2021. Notwithstanding, TRATON has not ruled out that the military conflict may have a further negative impact on TRATON's assets, financial position and operating profits. In this environment, Moody's also considers that the execution risks in terms of the company's plans to strengthen its capital structure have increased considering weaker capital market conditions as a result of the military conflict.TRATON's Baa2 rating reflects (i) the group's strong market positions in Europe and the Americas 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 of its main shareholder Volkswagen Aktiengesellschaft (A3 stable), which has provided liquidity support to TRATON and which is committed to remain a major shareholder.The rating negatively incorporates the (i) cyclical nature of truck market demand, (ii) the group's focus on medium- and heavy-duty trucks and buses with no other diversifying business operations, (iii) the group's improving but still relatively weak operating profitability, and (iv) high investment needs to manage the technological transformations towards zero emission vehicles and autonomous driving.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook reflects the expectation of a continued recovery of truck markets in Europe and Americas, despite short-term headwinds especially in Europe. It also reflects the expectation that TRATON will improve its profitability due to executed restructuring measures (especially at MAN) and the successful integration of Navistar.More specifically, the stable outlook reflects the expectation that TRATON's debt/EBITDA (Moody's adjusted) will improve into a range of 2.0x-2.5x over the next 12-18 months, with margins (Moody's adjusted EBITA) in a range of 6%-8%, which are commensurate for a Baa2.LIQUIDITYTRATON's liquidity position is excellent and allows it to fund sizable cash requirements that might be needed given the highly cyclical business. As of 31 December 2021, the group's sources of cash included cash and marketable securities of around €2.1 billion as well as an undrawn €4.5 billion revolving credit facility (maturing in December 2026, with two one-year extension options). Together with FFO estimated at around €4.0 billion over the next twelve months, total cash sources amount to around €11 billion. These sources cover of uses totaling to nearly €10 billion. Large upcoming debt repayments (€5.5 billion in 2022) are due to a significant degree from group's financial services segment included in our liquidity analysis (€3.8 billion). Further cash uses relate to working cash of around €1 billion, capex of around €1.9 billion, potential working capital outflows of around €1 billion as well as proposed dividend payments of €250 million.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSTRATON's ratings could be downgraded in case of (1) EBITA margin sustainably below 6%, (2) leverage (Debt/EBITDA) remaining sustainably and materially above 2.5x, (3) a weakening liquidity profile as well as (4) a negative Free Cash Flow generation.Moody's would consider upgrading the rating in case of (1) EBITA margin of around 8% through the cycle; (2) positive Free Cash Flow on a sustainable basis; (3) Debt/EBITDA consistently below 2.0x; as well as (4) evidence of a more conservative financial policy, including execution of measures to sustainably strengthen the company's capital structure.LIST OF AFFECTED RATINGS:..Issuer: TRATON Finance Luxembourg S.A.Downgrades:....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1Outlook Actions:....Outlook, Changed To Stable From Negative..Issuer: TRATON SEDowngrades:.... LT Issuer Rating, Downgraded to Baa2 from Baa1....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1Outlook Actions:....Outlook, Changed To Stable From Negative..Issuer: TRATON Treasury ABDowngrades:....BACKED Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1Outlook Actions:....Outlook, Changed To Stable From NegativePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY 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, Navistar and VWCO. Moreover, TRATON offers customer financing solutions through its Scania and partly Navistar financial services business.During the year 2021, TRATON's Industrial business (excl. financial services) generated revenues of €29.7 billion and a company-adjusted operating profit of €1,599 billion. 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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