(The following statement was released by the rating agency)
MOODY'S CONFIRMS DAIMLERCHRYSLER'S A3 LONG-TERM RATINGS; NEGATIVE OUTLOOK
Approximately EUR49 Billion of Debt Securities Affected
NEW YORK, Sept 18 - Moody's Investors Service today confirmed the A3 long-term senior unsecured ratings of DaimlerChrysler AG (DaimlerChrysler) , concluding the rating review initiated on 4 June 2003. The outlook for the ratings is negative. DaimlerChrysler's Prime-2 short-term debt rating was not included in the rating review and remains unchanged. The rating confirmation is based on Moody's expectation that the impact of the severe competitive challenges Chrysler faces in the U.S., will -- for the time being -- likely be mitigated by DaimlerChrysler's other divisions to the extent that financial flexibility and cash flow generation will remain in line with the A3 rating category. In addition, the rating confirmation also reflects Moody's view that, over the medium term, Chrysler Group will successfully shift its product line-up from high volumes in declining segments (especially Minivans) towards newer and more competitive models (Pacifica, etc.) so as to firmly establish the division's role as an earnings and cash contributor for the group. Moody's anticipates that the Chrysler Group's continued likely weakness in terms of its near-term operating performance and cash generation will be more than offset by the sustained strength in the performance of the Mercedes-Benz Car Group. Indeed, despite the continued market weakness, Moody's believes that the Mercedes-Benz Car Group should continue to post significant operating profits, supported by its outstanding brand equity value, competitive position and customer loyalty. In fiscal 2002, the Mercedes-Benz Car Group generated EUR3 billion of operating profits, while contributing most of DaimlerChrysler's industrial free cash flow of EUR1.4 billion (gross cash flow after working capital, dividends and capex). Likewise, Moody's expects a positive earnings contribution from the Services division (EUR1 billion operating profit in 2002) and believes that prospects for the Commercial Vehicles unit are neutral to positive, while noting that they primarily depend on future developments of global truck markets. Moody's highlights that further important factors mitigating a potential cash flow deterioration at the Chrysler Group are DaimlerChrysler's industrial net cash position, which stood at EUR1 billion at 30 June 2003, and its excellent liquidity position. The group's cash sources are largely based on US$18 billion worth of headroom in unused backup facilities -- of which US$13 billion relate to highest-quality arrangements -- EUR13.5 billion of available cash reserves (incl. marketable securities) and over EUR15 billion of securitisation potential, and should cover estimated cash needs for the group for the coming 12 months and beyond. The negative rating outlook, however, reflects Moody's concern that the substantial competitive pressures currently observed in U.S. automotive markets will continue to negatively impact the operating performance of Chrysler Group division over the coming quarters and potentially beyond, thereby leading to a continued elevated likelihood of sustained adverse effects on DaimlerChrysler's cash generation and financial flexibility in the short to medium term. The negative outlook further reflects the risk that demand for the new models being launched in 2004 will remain weak and that residual value risks resulting from a continued decline in used car prices might lead to additional impairments in the financial services division. In line with the profit warning issued on 3 June 2003, DaimlerChrysler's Chrysler Group posted a Q2 operating loss of EUR0.95 billion as a result of the intensified competition in the U.S. market. The main loss drivers were volume effects owing to the weakness of U.S. automotive markets, the ongoing increase in sales incentives among most automotive manufacturers as well as inventory write-offs. At the same time, DaimlerChrysler's management dropped its formerly announced fiscal 2003 operating profit target of US$2 billion. Instead, the company's management now expects Chrysler to achieve a slightly positive operating profit. Moody's cautions that it will be challenging for Chrysler to break even in 2003. With an H1 operating loss of EUR0.80 billion, the division would need a substantial recovery of operating performance in H2 2003. In Moody's opinion, however, a solid recovery remains at risk in light of the sustained competitive pressures and the division's relatively weak current product line-up. We are concerned that insufficient revenue generation in the coming quarters will not be fully offset by management's planned cost reductions of US$1 billion over the coming 12 months. Consequently, although DaimlerChrysler generated a positive industrial free cash flow (gross cash flow after working capital, dividends and capex) of EUR1.4 billion in H1 2003, potential cash consumption at Chrysler in H2 2003 may have a material adverse impact on the group if demand remains weak, sale incentives remain at high levels and newly launched models are not sufficiently accepted. The following ratings have been confirmed: - DaimlerChrysler AG: A3 rating for senior debt. - DaimlerChrysler North America Holdings Corporation: A3 rating for senior debt. - DaimlerChrysler Australia/Pacific Pty. Ltd.: A3 rating for senior debt. - DaimlerChrysler Canada Finance Inc.: A3 rating for senior debt. - DaimlerChrysler Coordination Center S.A.: A3 rating for senior debt. - DaimlerChrysler International Finance B.V.: A3 rating for senior debt. - DaimlerChrysler Japan Holdings: A3 rating for senior debt. - DaimlerChrysler Luxembourg Finanz S.A.: A3 rating for senior debt. - DaimlerChrysler U.K. Holdings Plc.: A3 rating for senior debt. - Chrysler Corporation: A3 rating for senior debt. - Auburn Hills Trust: A3 rating for senior debt. DaimlerChrysler AG, with dual headquarters in Stuttgart, Germany and Auburn Hills, Michigan, U.S. is the fifth largest automobile company as measured by unit volume and the largest manufacturer of commercial vehicles. In fiscal 2002, DaimlerChrysler recorded sales of EUR149.6 billion.