German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable
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Research Update:
German Truck Manufacturer TRATON SE Affirmed At
'BBB' Upon Navistar Acquisition; Outlook Stable
July 9, 2021
Rating Action Overview
PRIMARY CREDIT ANALYST
- On July 1, 2021, German truck manufacturer, TRATON SE completed the acquisition of Navistar Marta Bevilacqua
International Corp., giving it direct access to the American truck market. Milan
+ (39)0272111298
- TRATON has strong ties with its parent Volkswagen AG (VW) and we do not expect VW to reduce
marta.bevilacqua
its stake in TRATON below 75%. Therefore, we view it as a highly strategic subsidiary of the VW @spglobal.com
group.
SECONDARY CONTACT
- Even though the acquisition will cause TRATON's adjusted debt to spike to about €8.0 Vittoria Ferraris
billion-€8.5 billion in 2021 (from about €3.0 billion in 2020), this has a neutral impact on its Milan
rating and we affirmed our 'BBB' long-term issuer credit rating on TRATON based on our + 390272111207
expectation of group support. vittoria.ferraris
@spglobal.com
- The stable outlook on TRATON mirrors that on VW, which owns 89.7% of the company.
Rating Action Rationale
TRATON's debt-financed acquisition of U.S.-based truck manufacturer Navistar will give it
direct access to the U.S. truck market. That said, S&P Global Ratings considers the transaction
as neutral to TRATON's credit standing because we view TRATON as a highly strategic subsidiary
of VW. On July 1, 2021, TRATON acquired Navistar in full for about €3.2 billion and refinanced
about €3.1 billion of its debt. We forecast that its industrial business will have S&P Global
Ratings-adjusted FFO to debt comfortably above 45% from 2023 onward. Although this
represents an improvement from 13.6% in 2020, it remains below the 99% seen in 2019.
The transaction completes TRATON's strategic plan to increase its geographic reach and brand
offering in developed economies. It will allow the group to directly compete on a global scale
with players such as Daimler Truck or AB Volvo. The acquisition is marginally positive for TRATON's
business because it gives it a strong foothold in the U.S. market, which is the most profitable
globally. At the same time, it adds complexity to the group. We think the group would need to
further integrate its brands to achieve sustainable and stable profitability while increasing its free
operating cash flow to a level comparable with benchmark companies in this sector, such as
www.spglobal.com/ratingsdirect July 9, 2021 1Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable Paccar Inc. or AB Volvo. These two companies enjoy higher ratings. We also note that brand integration in this sector is typically complex and can take several years. Although TRATON displays good market momentum, supported by a strong order book after a depressed 2020, the effect on its operations and profitability are offset by Man SE's business realignment. We expect TRATON's EBITDA, pro forma the Navistar acquisition, to reach about €2.5 billion-€3.0 billion in 2021. We adjust EBITDA to account for the amount we estimate Man SE's realignment will require (about €600 million). Therefore, we forecast adjusted EBITDA for TRATON's industrial business will be about 8.5%-9.0%. This is close to its 2019 level, and an increase from 4.1% in 2020. Chip shortages will create some intrayear working capital build-up, normalizing by year end. Nevertheless, we understand that TRATON hasn't halted its production and doesn't plan to do so. Under our revised base case we now expect free operating cash flow (FOCF) for the industrial business to reach about €650 million-€750 million. We consider that Navistar, after the debt refinancing, is likely to be FOCF-neutral in 2021. However, there is limited visibility on supply chains and raw material price inflation. Changes to these could alter production patterns and cash flows, resulting in a deviation from what we currently expect. TRATON has strong ties with its parent, VW. In 2020, TRATON contributed about 14.5% of VW's consolidated top line. Moreover, TRATON has access to VW's purchasing platforms and both Man SE and Volkswagen Caminhoes e Onibus' (VWCO) financial services are offered through VW's captive operations. So as long as we view TRATON as highly strategic to the VW group, we will rate it a maximum of one notch below our rating on VW, currently at 'BBB+'. Our rating on TRATON could equal, but not exceed, the rating on VW if the stand-alone credit profile (SACP) were to be at least equal to the rating on VW. TRATON's credit metrics will be weak in 2021-2022, but management is focused to improving its financial flexibility. Credit metrics will remain soft over the coming two years, following a low 13.6% in 2020. For 2021-2022, we now expect FFO to debt of about 30%-40%. Based on our revised base case, which incorporates Navistar, we don't expect TRATON's FFO to debt to rise well above 45% before 2023. We understand the company will actively work on its capital structure. We consider that TRATON's financial policy is to retain an investment-grade rating on a stand-alone basis. Therefore, we revised our SACP on TRATON to 'bbb-' from 'bbb'. We would consider reviewing our SACP on TRATON upward when its FFO to debt rises sustainably above 60%. Outlook The stable outlook on TRATON mirrors that on VW, as long as VW owns more than 75% of TRATON. Upside scenario We could take a positive rating action on TRATON following a positive rating action on VW. Downside scenario Although it is unlikely, given VW's solid headroom under the 'BBB+' rating, we could lower our rating on TRATON following a similar action on VW. www.spglobal.com/ratingsdirect July 9, 2021 2
Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable Company Description TRATON was founded in 2015 as the commercial vehicles arm of VW. It sells trucks and buses under the Scania, Man, and VWCO brands. TRATON is the market leader in both Europe (33% market share) and Brazil (38%) for heavy-duty trucks (more than 15 tons). The Navistar acquisition gives TRATON the No. 4 position in the U.S. heavy duty truck market. For the 12 months to Oct. 30, 2020, Navistar recorded revenue of $7.3 billion, a decrease of 33.7% compared with the previous year. Its adjusted EBITDA under its industrial business was $101 million, down from $1,038 million the year before. The company is mainly active in Europe and South America, and has an international footprint in 17 countries, with 29 production and assembly sites. TRATON recorded revenue of more than €22.5 billion and adjusted EBITDA margin of 4.3% under its industrial business in 2020 (9% in 2019). Currently, the company sells new vehicles supported by either Scania's financial business operations (for the Scania brand) or VW's financial services (for the Man and VWCO brands). TRATON is controlled by VW group, which has owned about 90% of its share capital since the initial public offering in June 2019. TRATON is listed on the Frankfurt stock exchange and Nasdaq Stockholm. As of July 9, 2021, its market capitalization was about €13.5 billion. Our Base-Case Scenario Assumptions - Real GDP growth in the eurozone of 4.4% in 2021 and 4.5% in 2022, after a contraction of 6.7% in 2020. Brazil's real GDP will grow 4.7% in 2021, followed by 2.1% in 2022, after a 4.4% contraction in 2020. Real GDP in the U.S. will grow 6.7% in 2021, followed by 3.7% in 2022, after a 3.5% contraction in 2020. - Based on this, heavy-duty truck sales in Europe are likely to increase 15%-20% this year. For 2022, we expect further growth of 7.5%-12.5%, bringing volumes back to pre-pandemic levels. For South America, we expect heavy-duty trucks unit sold to recover by 17.5%-22.5% in 2021 after a 20% contraction in 2020, and for 2022, we see additional growth of 12.5%-17.5%. For the U.S., we expect heavy-duty truck sales of 22.5%-27.5% in 2021 and 7.5%-12.5% in 2022; this compares with a contraction of about 30% in 2020 (see "Global Heavy Truck Sales Forecasts: Declines In APAC Offset Growth In U.S. And EMEA," published June 10, 2021, on RatingsDirect). - Our expectations for the global commercial vehicle market will likely evolve throughout the second half of 2021 as visibility on the global semiconductor shortage begins to improve. - Our base case considers the €3.2 billion acquisition of Navistar, which closed on July 1, 2021. We have consolidated Navistar into TRATON on a pro forma basis. - We expect industrial adjusted EBITDA for 2021 of about €2.5 billion-€3.0 billion, compared with about €900 million in 2020 and €2.4 billion in 2019. For 2022, we expect industrial business to show operating profit (measured as adjusted EBITDA) of about €3.5 billion-€4.0 billion, as the group benefits from lower restructuring costs. - We assume a corporate tax rate of about 22% for 2021, increasing to 30% for 2022. - Trade working capital changes of about -€700 million for 2021, further compounded by changes www.spglobal.com/ratingsdirect July 9, 2021 3
Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable
in leasing and rentals of about €1.2 billion, resulting in a cash absorption of about €1.9 billion.
For 2022, we expect neutral changes in trade working capital, as the group makes strides to
improve its position back to pre-pandemic levels. Including changes in leasing and rentals, we
foresee changes in working capital of -€1.4 billion.
- Capex in the industrial business, including capitalized development costs, will be €1.4
billion-€1.5 billion for 2021 and 2022, slightly more than 2020's level of €1.3 billion and in line
with 2019 levels.
- Dividend of €125 million to be paid in 2021, while for 2022 we assumed dividend payments of
about €350 million-€400 million.
- In 2021, TRATON will undertake a squeeze-out under which it will purchase the shares held by
Man SE's noncontrolling minority shareholders for €600 million in cash.
Key metrics
Table 1
TRATON SE--Key Metrics*
--Fiscal year ended Dec. 31--
(Mil. €) 2019a 2020a 2021e§ 2022f
Revenue 26,444 22,156 30,000-35,000 32,500-37,500
Revenue growth (%) 5.9 (16.2) 48.0-52.0 8.0-12.0
EBITDA 2,379 899 2,500-3,000 3,500-4,000
EBITDA margin (%) 9.0 4.1 8.5-9.0 10.0-10.5
Free operating cash flow (FOCF) (357) 789 650-750 1,100-1,200
Debt 1,854 2,967 8,000-8,500 7,500-8,000
Debt to EBITDA (x) 0.8 3.3 2.8-3.2 1.8-2.2
FFO to debt (%) 98.9 13.6 28-32 37-40
*All figures adjusted by S&P Global Ratings. §Pro forma the acquisition of Navistar. a--Actual. e--Estimate. f--Forecast.
Ratings Score Snapshot
Issuer Credit Rating: BBB/Stable/--
Business risk: Satisfactory
- Country risk: Intermediate
- Industry risk: Moderately high
- Competitive position: Satisfactory
Financial risk: Intermediate
- Cash flow/Leverage: Intermediate
Anchor: bbb-
www.spglobal.com/ratingsdirect July 9, 2021 4Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable Modifiers - Diversification/Portfolio effect: Neutral (no impact) - Capital structure: Neutral (no impact) - Liquidity: Adequate (no impact) - Financial policy: Neutral (no impact) - Management and governance: Satisfactory (no impact) - Captive finance: Neutral (no impact) - Comparable ratings analysis: Neutral (no impact) Stand-alone credit profile: bbb- - Group credit profile: bbb+ - Entity status within group: Highly strategic (+1 notch from SACP) Related Criteria - General Criteria: Group Rating Methodology, July 1, 2019 - Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019 - Criteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018 - General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 - Criteria | Corporates | General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015 - Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 - General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 - General Criteria: Methodology: Industry Risk, Nov. 19, 2013 - Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013 - General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012 - General Criteria: Principles Of Credit Ratings, Feb. 16, 2011 - General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 Related Research - Global Heavy Truck Sales Forecasts: Declines In APAC Offset Growth In U.S. And EMEA, June 10, 2021 - Volkswagen AG Outlook Revised To Stable From Negative On Stronger-Than-Expected Free Cash Flow Generation, April 28, 2021 www.spglobal.com/ratingsdirect July 9, 2021 5
Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable
Ratings List
Ratings Affirmed
TRATON SE
Issuer Credit Rating BBB/Stable/--
TRATON Finance Luxembourg S.A.
Senior Unsecured BBB
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www.spglobal.com/ratingsdirect July 9, 2021 6Research Update: German Truck Manufacturer TRATON SE Affirmed At 'BBB' Upon Navistar Acquisition; Outlook Stable
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