Volvo Cars’ outlook changed to negative from stable by Moody’s Ratings

Investing.com -- Moody’s Ratings has today adjusted the outlook for Volvo Car AB (ST:VOLCARb) (Volvo (OTC:VLVLY) Cars) to negative from stable, while affirming Volvo Cars’ Ba1 corporate family rating (CFR). The agency also affirmed the Ba1-PD probability of default rating, its Ba1 guaranteed senior unsecured instrument ratings, and its (P)Ba1 backed senior unsecured Medium Term Note (MTN) program rating.

This rating adjustment is driven by the expectation that Volvo Cars’ operating performance will remain subdued this year due to a challenging market environment. Rising macroeconomic challenges and trade tensions affecting the US market are adding to the difficulty of improving Volvo Cars’ profitability as previously anticipated.

The negative outlook suggests that Moody’s might lower the rating to Ba2 if Volvo Cars fails to demonstrate signs of operational recovery, such as improvements in margins and free cash flow, in the coming months. This potential downgrade could be driven by continued macroeconomic challenges in Volvo Cars’ key markets and increasing trade tensions, including significant permanent tariffs. Despite these challenges, Volvo Cars’ balance sheet remains strong, with good liquidity and relatively low leverage, supporting the affirmation of the rating at the Ba1 level.

The rating incorporates a cautious outlook on the macroeconomic environment, including a slowdown of the G-20 GDP growth to 1.9% in 2025, down from 2.9% in 2024. Unpredictable US trade policy could undermine consumer confidence and disrupt supply chains. Currently, there is a 25% tariff on imports of both finished vehicles and components from Europe, which poses a risk to Volvo Cars as it imports approximately 100,000 vehicles from Europe.

Volvo Cars has one factory in the US in Charleston, South Carolina, which is currently underutilized. The company currently imports around 100,000 vehicles from Europe to the US, mainly XC40, XC60, and XC90. The new management plans to increase the production capacity of its US plant, likely by adding a new model to serve the US market.

Volvo Cars reported weak Q1 2025 figures, with revenue down 12% year-over-year and an EBIT margin of 2.3%. Retail sales fell 8% in Europe and 12% in China, while the U.S. saw an 8% increase, likely due to pre-buying before import tariffs. For 2025, Moody’s expects a revenue decline and a low 2.0% EBIT margin, along with a negative free cash flow of SEK 14 billion, excluding tariff costs as estimated by management. Operating performance and cash flow are forecasted to improve by 2026, driven by a new cost-saving program.

Volvo Cars’ Ba1 CFR is underpinned by its well-known brand identity and established domestic market presence, global reach including a significant presence in China through ties with main shareholder, the Zhejiang Geely Holding Group Company Limited, ongoing substantial investments in electrification and modular platforms, prudent financial policies with moderate leverage, and a very good liquidity profile.

However, the rating is constrained by Volvo Cars’ modest market position and smaller size compared to global premium competitors, lower profitability than some other premium manufacturers, reliance on a few models, exposure to stricter environmental standards that necessitate high capital and R&D expenses, and the company’s exposure to the cyclical and competitive global automotive industry.

Volvo Cars’ liquidity profile is very good, supported by unrestricted cash and cash equivalents of around SEK43.5 billion as of end-March 2025 and access to a new €1.5 billion multi-currency revolving credit facility maturing in 2029 and a new €0.5 billion facility maturing in 2027, both fully undrawn at March 2025. The company’s liquidity sources include funds from operations which are expected to reach SEK32 billion in 2025.

Volvo Cars’ rating could be downgraded if the company’s credit metrics deteriorated, including if Moody’s adjusted EBIT margin remained below 4%, free cash flows remained negative, or Moody’s-adjusted debt/EBITDA exceeded 3.0x. A material shift in the company’s conservative financial policy or sizable debt-funded acquisitions could also lead to a downgrade.

Given the negative outlook, an upgrade is unlikely in the near-term. Upward rating pressure could develop in the medium-term if the company was able to successfully transform its product portfolio towards low and zero emission vehicles whilst improving the product breadth and enhancing its geographic diversity.

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