Mercedes 2006 Annual Report Download - page 78

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Credit ratings
During the year 2006, the rating agency Standard & Poor’s
(S&P) kept its long-term rating of BBB and its short-term rating of
A-2 unchanged. On August 4, 2006, S&P changed the outlook
on the long-term rating from stable to positive. According to S&P,
the outlook revision acknowledged the structural improvements
at the Mercedes Car Group, which had successfully been tackling
its quality problems, and the improvements at the so-far unpro-
fitable smart brand. S&P considers that the Mercedes Car Group
is on track to reach its announced operating-profit target of 7%
return on sales in 2007. But S&P also mentioned that the progress
in this division was somewhat offset by the rapidly declining
results at the Chrysler Group. On September 15, 2006, S&P
revised its outlook back to stable. This outlook revision followed
a reduced operating profit guidance for the Chrysler Group for the
third quarter and full-year 2006, as well as a lowered operating
profit guidance for the DaimlerChrysler Group for the year 2006.
S&P stated that the outlook change reflected the unexpectedly
severe decline in profitability at the Chrysler Group.
On September 15, 2006, Moody’s Investor Service (Moody’s)
downgraded the long-term ratings of DaimlerChrysler AG and its
subsidiaries from A3 to Baa1, and placed all long-term ratings
under review for possible downgrade. The P-2 short-term ratings
were affirmed. The downgrade followed DaimlerChrysler’s
announcement of the reduced forecast for the Chrysler Group’s
operating profit for the year 2006 and reflected (i) Moody’s
view that one of the key conditions set for an A3 rating – main-
taining the turnaround at the Chrysler Group leading to an oper-
ating margin for this division of above 3% – will not be achieved
in the near term; (ii) the negative impact on DaimlerChrysler’s
overall profitability and cash generation with the expectation
of a negative industrial free cash flow (as defined by Moody’s) in
2006. The decision to place the ratings under review for possi-
ble downgrade was based on the expectation of further financial
pressure resulting from (i) the ongoing weak market environ-
ment for the Chrysler Group, which will probably continue to neg-
atively affect DaimlerChrysler’s financial profile; (ii) the effects
of shifting consumer trends away from more profitable large SUVs
and light trucks, with which the Chrysler Group generates most
of its revenues, to more fuel-efficient, less profitable smaller vehi-
cles; (iii) the potential need for further structural measures to
improve the Chrysler Group’s operations. On February 14, 2007,
following the presentation of the preliminary earnings figures
for the year 2006 and of the Recovery and Transformation Plan for
the Chrysler Group, Moody’s concluded its ratings review and
confirmed its Baa1 rating. The outlook on the rating remained
negative.
During the year 2006, Fitch Ratings (Fitch) kept its long-term
rating of BBB+ and its short-term rating of F2 unchanged. The
outlook on the long-term rating remained stable.
During the year 2006, Dominion Bond Rating Service (Dominion
Bond) also kept its long-term rating of A (low) and its short-term
rating of R-1 (low) unchanged. The outlook on the long-term rating
remained negative. Due to the Chrysler Group’s difficult compe-
titive situation, Dominion Bond changed its long-term rating
from A (low) to BBB (high) on February 14, 2007. It confirmed its
short-term rating of R-1 (low).
A-2
P-2
F2
R-1 (low)
BBB
A3
BBB+
A (low)
A-2
P-2
F2
R-1 (low)
BBB
Baa1
BBB+
A (low)
2006 2005
Short-term credit ratings
Standard & Poor’s
Moody’s
Fitch
Dominion Bond
Long-term credit ratings
Standard & Poor’s
Moody’s
Fitch
Dominion Bond