French Auto Supplier Valeo 'BBB-/A-3' Ratings Placed On CreditWatch Negative On COVID-19 Impact
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Research Update:
French Auto Supplier Valeo 'BBB-/A-3' Ratings
Placed On CreditWatch Negative On COVID-19
Impact
April 3, 2020
Rating Action Overview
PRIMARY CREDIT ANALYST
- We project the impact of the COVID-19 pandemic will lead to a global auto sales decline of Margaux Pery
almost 15% in 2020, as well as weaker global demand and GDP growth, followed by a mild Paris
recovery in sales volumes of 6%-8% in 2021. (33)1-4420-7335
margaux.pery
- Automakers' plant closures in response to the pandemic will likely materially hurt Valeo's @spglobal.com
earnings and cash flow in 2020, likely leading to a decline in the EBITDA margin to 6%-8%
SECONDARY CONTACT
versus 9.2% in 2019.
Vittoria Ferraris
- We are therefore placing our 'BBB-' ratings on Valeo and its unsecured debt, as well as our 'A-3' Milan
short-term rating on CreditWatch with negative implications. (39) 02-72111-207
vittoria.ferraris
- We expect to resolve the CreditWatch during the second quarter of 2020 once we have @spglobal.com
additional information about the potential impact of the COVID-19 pandemic on the group's
ADDITIONAL CONTACT
earnings and cash flows in 2020, as well as the effectiveness of the group's countermeasures
Industrial Ratings Europe
to preserve margins and cash flow generation.
Corporate_Admin_London
@spglobal.com
Rating Action Rationale
The global spread of COVID-19 has worsened an already difficult business environment for the
global auto industry. With about 70% of its sales stemming from Europe and North America, we
expect that Valeo's 2020 operating performance will suffer, due to the production cuts major
automakers have announced in these regions as a result of likely weaker sales volumes. Because
of the COVID-19 pandemic and resulting economic pressure, we now project that auto sales will
decline by 15%-20% in the U.S. and Europe, and by 8%-10% in China, in 2020. We expect
production rates to decline in a similar pattern. Based on our revised scenario, we assume Valeo's
group revenues will decline by 8%-10% this year, with the adjusted EBITDA margin dropping to
6%-8% from 9.2% in 2019. In our view, Valeo is likely to outperform market growth in 2020 thanks
to its strong order intake in recent years.
S&P GLOBAL RATINGS360 April 3, 2020 1
© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of
Use/Disclaimer on the last page.Research Update: French Auto Supplier Valeo 'BBB-/A-3' Ratings Placed On CreditWatch Negative On COVID-19 Impact Free operating cash flow will likely decline substantially in 2020 due to the high fixed-cost base. We would expect Valeo to take the necessary measures to contain costs through, for example, partial unemployment schemes, reduction of temporary workers, and reducing purchasing volumes. However, we also expect the decline in earnings will not be fully compensated by a reduction in nondiscretionary capital expenditure (capex) and a potential working capital inflow, which we do not include in our base case at the moment, given the volatile market conditions and possible need to support struggling suppliers. We would therefore expect adjusted free operating cash flows to fall significantly to about breakeven levels in 2020 from €503 million in 2019. As a result, Valeo's credit metrics would be weak for the current rating in 2020, including funds from operations (FFO) to debt of between 20% and 25%, and debt to EBITDA of 3x-4x. We also forecast a recovery of the group's operations next year, which could allow FFO to debt to return to about 30%, and debt to EBITDA to be lower than 3x by the end of 2021. Valeo's financial policy is a key lever to support the investment-grade rating. Given the limited flexibility in cutting investments such as capex, and Valeo's contribution to its joint venture with Siemens, we view the company's financial policy as an important internal tool to partly mitigate the expected increase in adjusted net debt. We continue to assess Valeo's liquidity as adequate. Valeo ended 2019 with about €1.8 billion of cash on the balance sheet and about €1.1 billion of available credit lines maturing in December 2022. With limited debt maturing in 2020 and assuming a normalization of production from May 2020, we believe that Valeo's liquidity sources will cover its capex needs, potential working capital outflows and contributions to its joint-venture with Siemens. Valeo credit facilities contain a financial maintenance covenant stipulating reported net debt to EBITDA of less than 3.5x. At the end of December 2019, the company's net leverage ratio stood at 1.13x, providing comfortable headroom under the covenant. Under our current base case, we consider that the headroom will decrease but remain comfortably above 15%. Environmental, social, and governance (ESG) factors relevant to the rating action: - Health and safety. CreditWatch We expect to resolve the CreditWatch during the second quarter of 2020 once we have additional information about the impact of the COVID-19 pandemic on the group's earnings and cash flows in 2020, as well as the effectiveness of the group's countermeasures to preserve margins and cash flow generation. Downside scenario We could lower the rating if the group's production facilities remain shut down for longer or auto production volumes are likely to be even lower in 2020-2021 than we currently expect, causing Valeo's credit metrics to deteriorate more significantly than currently forecast, with no prospects of FFO to debt returning to above 30% and free operating cash flow to debt approaching 10% by the end of 2021. S&P GLOBAL RATINGS360 April 3, 2020 2 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page.
Research Update: French Auto Supplier Valeo 'BBB-/A-3' Ratings Placed On CreditWatch Negative On COVID-19 Impact Upside scenario We could affirm the rating if the likely impact from COVID-19 is less severe than expected or if the company's countermeasures are more effective than we have currently factored into our base case. Company Description With about €19.5 billion of sales reported in 2019, Valeo is a large automotive supplier providing major carmakers such as Volkswagen, Ford, Renault-Nissan, Peugeot, BMW, and Daimler with visibility systems, powertrain systems, comfort and driving assistance systems, and thermal systems. The group designs, produces, and sells components, systems, and modules for automobiles, both for the original equipment market (about 85% of revenues) and the after-market (about 10% of revenues). Valeo produces a broad range of components, including climate control, engine cooling, wipers, transmission, lighting, and electronic systems. The group also has a 50% stake in a joint venture with Siemens to develop high-voltage components targeted at electrified powertrains for hybrid and battery electric cars. The group is headquartered in France and is listed on Euronext Paris. 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 And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 - Criteria | Corporates | Industrials: Key Credit Factors For The Auto Suppliers Industry, Nov. 19, 2013 - Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013 - General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 - General Criteria: Methodology: Industry Risk, Nov. 19, 2013 - General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012 - General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List S&P GLOBAL RATINGS360 April 3, 2020 3 © S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of Use/Disclaimer on the last page.
Research Update: French Auto Supplier Valeo 'BBB-/A-3' Ratings Placed On CreditWatch Negative On COVID-19 Impact
CreditWatch/Outlook Action
To From
Valeo S.A.
Issuer Credit Rating BBB-/Watch Neg/A-3 BBB-/Stable/A-3
Senior Unsecured BBB-/Watch Neg BBB-
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors,
have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such
criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of
S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at
https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings
information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating
action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search
box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support
Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49)
69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
S&P GLOBAL RATINGS360 April 3, 2020 4
© S&P Global Ratings. All rights reserved. No reprint or dissemination without S&P Global Ratings' permission. See Terms of
Use/Disclaimer on the last page.Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees. S&P Global Ratings | Research | April 3, 2020 5
You can also read
