September 18, 2013 / 2:11 PM / 4 years ago

Fitch Affirms Renault at 'BB+'; Outlook Revised to Positive

(The following statement was released by the rating agency) LONDON/BARCELONA/WARSAW, September 18 (Fitch) Fitch Ratings has affirmed Renault SA's (Renault) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB+'. The Outlook on the Long-term IDR has been revised to Positive from Stable. The Outlook revision reflects the relative resilience of Renault's profitability and underlying cash generation in a difficult and adverse environment, notably for volume manufacturers, and particularly in the group's domestic market. We believe that Renault could be upgraded to 'BBB-' in the next 12 to 18 months if group operating margins trend towards 3%, including automotive profitability trending towards 2% combined with positive free cash flow (FCF), in line with our current base case. We will also assess the group's ability to generate consistent funds from operations (FFO) and to demonstrate that improving leverage is coming from underlying operations rather than asset sales and positive changes in working capital, which can be reversed. KEY RATING DRIVERS Relative Resilience of Profitability Renault's operating margin declined further to 1.8% in 2012 from 2.6% in 2011, but automotive operations were about breakeven in an adverse environment. Fitch expects a gradual strengthening of group margins towards 3% by 2014/2015 and of automotive margins towards 1.5%. The cost base benefited from increased synergies with Nissan, cost-cutting measures and increased production outside western Europe. Improved Credit Metrics Net financial debt has fallen substantially since 2009 as a result of positive FCF and asset sales, while EBITDA and FFO rebounded in the same period. Fitch assumes Renault's FFO adjusted net leverage will remain broadly unchanged at 0.3x at end-2013, after decreasing from 1x at end-2010 and 4.8x at end-2009, and cash from operations (CFO) on adjusted debt will stabilise around 34% at end-2013 in line with end-2012, before rebounding to about 40% at end-2014. Weak but Improving Mix Renault's sales are concentrated in Europe, with a bias to weaker Southern markets such as Spain, Italy and France, where the eurozone debt crisis has had the most impact on new car sales. This remains the case, despite ongoing and successful diversification. Renault also derives the majority of its revenue from the less profitable small- and medium-sized car segments, where competition is fiercest and price pressure is strongest. Entry-Level Models Success The success of the growing Dacia brand is pivotal in compensating for the sales declines of the core Renault models, and also favours geographical diversification. In addition, profitability of the entry range is higher than the automotive average and therefore bolsters group operating profit. Relationship With Associates Nissan Motor Co., Ltd's (BBB/Stable) latest performance plan calls for increased FCF generation and a higher dividend payment to Renault, its 43.4%-shareholder. However, the group intends to redistribute all of the dividends received from its associates, therefore limiting the benefit for Renault's creditors. Renault should also benefit from a gradual recovery of JSC AvtoVAZ (B-/Stable), but Fitch believes that this will only happen in the medium term. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to negative rating action include - Negative operating margins, coming notably from falling global sales - Deterioration of key financial metrics, including net adjusted leverage remaining above 1.5x and CFO/adjusted debt below 25% Future developments that may, individually or collectively, lead to positive rating action include - Sustainable improvement in financial metrics, including net adjusted leverage below 0.5x and CFO on total adjusted debt above 40% - Sustainable increase in market shares, combined with improved profitability, in particular, group operating margin trending towards 3% and auto operating margins trending towards 2% combined with positive FCF Contact: Principal Analyst Tom Chruszcz Director +48 22 338 6294 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 84 11 Fitch Ratings Espana S.A.U. 85 Paseo de Gracia 08008 Barcelona Committee Chairperson Frederic Gits Managing Director +33 1 44 29 91 84 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' dated 5 August 2013 is available at Note to Editors: Marc Ladreit de Lacharriere, Fitch's Chairman and member of the board, is also a member of Renault's board. Mr. Ladreit de Lacharriere does not participate in any rating committees, including Renault. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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