(The following statement was released by the rating agency)
Dec 19 -
Summary analysis -- Renault S.A. ---------------------------------- 19-Dec-2012
CREDIT RATING: BB+/Stable/B Country: France
Primary SIC: Motor vehicles
and car bodies
Credit Rating History:
Local currency Foreign currency
03-Nov-2010 BB+/B BB+/B
19-Jun-2009 BB/B BB/B
05-Mar-2009 BBB-/A-3 BBB-/A-3
24-Oct-2008 BBB/A-3 BBB/A-3
The ratings on French automaker Renault S.A. reflect Standard & Poor’s Ratings Services’ views of the group’s business risk profile as “fair” and financial risk profile as “intermediate.” The ratings are constrained by the company’s focus on the cyclical and highly competitive volume car market, its weak profitability, its dependence on the currently depressed European market, and its relative product concentration. Factors mitigating these constraints are Renault’s significant market shares in the entry-level auto segment and in the competitive European auto industry, and the positive contribution to cash flow from its captive finance arm, RCI Banque (BBB/Stable/A-2) and, through dividends, from its equity associate Nissan (in which Renault holds a 43.9% interest).
S&P base-case operating scenario
In our base-case scenario for 2012, we anticipate that Renault’s revenues will fall by a few percentage points, primarily on steep declines in unit sales in several European countries, including France, the U.K., Italy, and Spain. Europe still contributed 51% of Renault’s unit sales in the first nine months of 2012. In our view, growth in 2012 in Latin America, Asia, and other emerging countries, like Russia, Algeria, and Morocco will be insufficient to offset the adverse impact from declining sales in Europe for Renault.
In this context, we anticipate that operating margin for Renault’s automotive operations will fall below 1% of revenues this year, with group operating income close to EUR1 billion for full-year 2012. Renault’s consolidated operating margin averaged 2.3% in the first six months of 2012 and its core automotive division reported a low 0.4% EBIT margin for the period, down from 1.2% in full-year 2011.
In our base-case scenario for 2013, we anticipate no improvement in Renault’s operating margins compared with 2012 in a European car market that we expect to remain very sluggish following an expected 8% drop in sales in 2012 (and a 13% decline in France), with a possible improvement expected only in 2014.
Renault’s public guidance included a 5% consolidated operating margin target for 2013, compared with 2.3% reported at end-June 2012.
S&P base-case cash flow and capital-structure scenario
At the end of June 2012, Renault had about EUR5.3 billion in net debt, including Standard & Poor’s adjustments for operating leases, pension deficits, and deconsolidation of the substantial finance liabilities borne by the company’s captive finance subsidiary.
At end-June 2012, in a still favorable market environment, Renault’s credit ratios were fully coherent with its ratings. In particular, the 12-month rolling ratio of fully adjusted funds from operations (FFO) to debt was 43%, debt to EBITDA stood at 3.2x, and free operating cash flow (FOCF) to debt was 12.8%.
We believe that difficult market conditions for the remainder of 2012 will likely continue into 2013 and will probably depress Renault’s credit ratios. We forecast that Renault’s adjusted ratio of FFO to debt will be around 40% by year-end 2012 and adjusted debt to EBITDA will exceed 3x, which we still view as comfortable for the rating level. Credit ratios in 2013 will be supported by Renault’s disposal of its remaining stake in Swedish truck maker AB Volvo (BBB/Stable/A-2) for some EUR1.5 billion in December 2012.
We rate Renault through the cycle and expect the company to maintain credit metrics in line with its current ‘BB+’ rating even at the bottom of the cycle.
The short-term rating on Renault is ‘B’. We view Renault’s liquidity profile as “adequate” under our criteria on the basis of our projection that the group’s ratio of potential sources of liquidity to uses will comfortably exceed 1.2x in each of the coming two years. On June 30, 2012, Renault reported EUR7.4 billion of cash and cash equivalents for the automotive division of which we view EUR1.5 billion as necessary for ongoing operations. It had access to EUR3.7 billion in undrawn bilateral committed credit lines, of which the majority had a maturity in excess of 12 months.
Combined with available cash, these facilities are sufficient to cover the EUR4.5 billion in industrial debt maturing in less than one year.
According to management, the existing bank lines contain no financial covenants, and no material adverse change, negative pledge, or cross-default clauses. We also expect Renault to generate small, positive FOCF in 2012, which should slightly support liquidity.
The A shares that Renault held in Swedish truck maker AB Volvo (BBB/Stable/A-2), represented an additional source of financial flexibility for the company. Proceeds from the disposal will be partly used for deleveraging and partly for investments, including the acquisition of a further 12.5% stake in Russian manufacturer Avtovaz for US$366 million by mid-2014.
The issue rating on Renault’s unsecured pari passu-ranking debt is ‘BB+’ and the recovery rating is ‘3’, indicating our view of meaningful (50%-70%) recovery for Renault’s unsecured debt in the event of a payment default. At our hypothetical point of default in 2016 we calculate a stressed enterprise value of about EUR11.5 billion. We cap the recovery rating at ‘3’ due to the unsecured nature of the debt and our view that France is a less creditor-friendly jurisdiction.
The stable outlook reflects our view that Renault’s European operations will remain weak over the next 12 months but that the company will likely maintain credit ratios that we consider as commensurate with its ‘BB+’ rating. As such, we expect FFO to debt in the 20% to 30% range and debt to EBITDA of less than 4x even in the most difficult years, as may be the case in 2013. Volume car makers are subject to cyclicality and our target credit ratios incorporate buffers to enable us to rate through the cycle.
We could lower the ratings if Renault’s industrial operating performance weakened markedly, resulting in FFO to debt below 20%. This could happen, for instance, if Renault’s operating margin contracted by some 150 basis points versus the recent level or if the company failed to maintain positive FOCF in its automotive division over more than a year or so.
We could raise the ratings if the operating margin of Renault’s core automotive operations structurally improved toward the mid-single digits, including through periods of soft demand, and became fully commensurate with the 5% consolidated operating margin target set by Renault for year-end 2013. Further reduction of Renault’s dependence on the European market would also be beneficial, in our view.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008