Moody's on July 31 revised its outlook on Daimler AG to negative from stable. The rating agency cited the carmaker's continued financial deterioration, which began in 2018, and an increasingly challenging environment for the automotive industry.
The rating agency also affirmed the German company's A2 long-term issuer rating and Prime-1 short-term commercial paper ratings. However, it said Daimler's credit metrics are "well below levels appropriate" for the category.
"The change in outlook to negative reflects the continued erosion in Daimler's operating performance and financial metrics starting in 2018 and deteriorating further in the first half of 2019," Moody's said.
The agency noted factors impacting Daimler's 2018 operating performance. It cited ongoing proceedings related to diesel vehicles of its Mercedes-Benz brand, delivery delays resulting from Europe's new Worldwide Harmonised Light Vehicle Test Procedure and lower-than-expected demand in some markets.
The company previously said provisions for its ongoing governmental proceedings in connection to its diesel vehicles will increase by "a high three-digit million amount." On July 24, Daimler reported a €1.24 billion net loss for the second quarter of 2019. This was after it issued warnings that the alleged diesel emissions cheating and other regulatory issues would weigh on its earnings.
Moody's acknowledged that Daimler plans to launch its Move program aimed at cost savings and efficiency with details to be announced in November. But it expects that the initiative will result in significant up-front restructuring costs and will impact future cash flows and credit metrics.
A downgrade may occur if Daimler continues to lose share in its key markets, if its free cash flow is negatively affected by a more aggressive financial policy, or if significant fines or other remediation measures arise from any emission-related issues.
Moody's may upgrade the company if it sustains a strong operational and financial performance through a cyclical downturn.
S&P Global Ratings earlier in July also changed Daimler's outlook to negative from stable with a view that the German automaker may not be able to restore its profitability in 2020 due to weaker market conditions.