French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative
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Research Update:
French Automaker Renault Downgraded To 'BB+/B'
On Weaker Metrics Due To COVID-19; Outlook
Negative
April 9, 2020
Rating Action Overview
PRIMARY CREDIT ANALYST
- We project the impact of the COVID-19 pandemic will lead to a decline in global auto sales of Margaux Pery
about 15% in 2020, followed by a 6%-8% recovery in sales volumes in 2021. Paris
(33)1-4420-7335
- French automaker Renault has an ample liquidity cushion and can, in our view, count on
margaux.pery
guarantees from the French state. @spglobal.com
- We nevertheless expect Renault's earnings, free cash flow generation (FOCF), and financial SECONDARY CONTACT
position to weaken materially in 2020, following an already challenging 2019. Vittoria Ferraris
Milan
- We are downgrading Renault to 'BB+/B' from 'BBB-/A-3' and removing the ratings from
(39) 02-72111-207
CreditWatch negative, where we placed them on Feb. 19, 2020.
vittoria.ferraris
- We are assigning a 'BB+' issue rating '3(65%)' recovery rating to Renault's unsecured debt. @spglobal.com
ADDITIONAL CONTACT
- The negative outlook reflects the high degree of uncertainty regarding the economic impact of
Industrial Ratings Europe
the pandemic, its implications for global car sales, and how it could affect Renault's
Corporate_Admin_London
performance and ability to manage the expected earnings decline, cash outflows, and CO2 @spglobal.com
emissions targets.
Rating Action Rationale
The global spread of COVID-19 worsens what was already a difficult business environment for
the global auto industry. The outbreak of COVID-19 pandemic adds to the numerous headwinds
Renault is currently facing, including EU-mandated efforts to reduce carbon dioxide (CO2)
emissions. While we previously expected demand for automobiles to remain subdued in 2020 and
2021, we now project COVID-19 will lead to a significant decline in global auto sales of about 15%
in 2020, followed by a mild recovery in sales volumes of 6%-8% in 2021. The government's support
measures in the form of short-term work and the expense cuts the company is undertaking will
help reduce its high fixed-cost base.
www.spglobal.com/ratingsdirect April 9, 2020 1Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative We expect Renault's earnings, FOCF, and financial position to weaken materially in 2020, following an already challenging 2019. Our base case for Renault shows its EBITDA margin further weakening to about 3% in 2020, from an already low level of 6.3% in 2019 (7.8% in 2018), before recovering to about 5% in 2021. In addition, we expect significant negative FOCF of about €2 billion to €3 billion in 2020, and about negative €500 million to break-even levels in 2021. As a result, we expect the group's adjusted debt-to-EBITDA ratio to increase to about 2.0x-3.0x in 2020-2021, from about 0.3x at year-end 2019, which led us to revise our financial risk profile to intermediate from minimal. Renault has a large liquidity cushion and can count on guarantees from the French state if needed. Renault ended 2019 with ample cash reserves of about €16.3 billion, including about €12.8 billion of cash and about €3.5 billion of undrawn committed lines maturing between November 2021 and November 2024. This compares with short-term debt of about €2.0 billion, annual capital expenditure (capex; including capitalized research and development) of about €4.5 billion, and potentially meaningful intrayear working capital requirements in excess of the group's funds from operations. Cash burn is much higher in this unconventional downturn. A large liquidity position is advantageous for automakers because it helps them withstand the industry's cyclicality. Still, having most of a company's plants and most dealerships close within very short time is a different stress than that of a conventional severe recessionary downturn, where automakers are still producing and selling vehicles and thereby covering fixed costs to varying degrees. In the current shutdown, the cash burn rate is therefore much higher, albeit partly mitigated by government sponsored short-term work. Production will gradually resume. We believe Renault will have sufficient liquidity to cover a potential production standstill for at least two months, without additional measures or government support. Even if plants are shuttered longer than currently anticipated, we assume a gradual resumption of production in May. We also understand that Renault would be eligible to receive additional funding with a guarantee from the French state, if needed. Nevertheless, in a longer-than-expected shutdown scenario, the group's indebtedness would increase even more significantly and leverage ratios would weaken further. We expect to gain more visibility on Nissan's dividend policy in May 2020. Renault holds a 43.4% stake in Nissan. We add back dividends received from Nissan and to a much lesser extent from other equity affiliates to our calculation of Renault's EBITDA and FOCF. While dividends received from affiliates have increased over the past few years to reach €828 million in 2018, they dropped to €625 million in 2019. Besides, in light of its own operating challenges, Nissan has indicated that it will not pay any interim dividend to Renault in the first half of 2020, and have no have visibility on future dividend payments. Nissan will release its accounts for the fiscal year ending March 2020 in May 2020, and we expect it will provide at that time an update to its mid-term plan including guidance on financial policy. The pandemic is reducing Renault's financial flexibility to absorb a potential fine due to noncompliance with the CO2 emissions targets in Europe. With fleet-average CO2 emissions of 118 grams per kilometer (g/km) at the end of 2019 in Europe, Renault needs to bridge a large gap of 25 grams to meet the regulatory CO2 emissions level of about 93 g/km at the end of 2020. We calculate that 1g in excess of the limit would be equivalent to a fine of about €150 million based on 2019 unit sales of passenger cars in Europe. Some of the company's initiatives to bridge this gap www.spglobal.com/ratingsdirect April 9, 2020 2
Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative in 2020 could be delayed due to the COVID-19 pandemic. For example, Renault had planned to launch low-CO2-emitting vehicles in second-half 2020, under its E-TECH technology, which could now face delays due to the current plant shutdowns. This could represent a strain on Renault's efforts to achieve the required reduction in CO2 emissions. Given the material impact expected on Renault's financial position due to the novel coronavirus, we believe that the company's financial flexibility to absorb a regulatory fine is reducing. We will monitor any updates on potential amendments to the CO2 emissions targets for 2020 due to the COVID-19 pandemic in Europe. Environmental, social, and governance (ESG) factors relevant to the rating action: - Greenhouse gas emissions - Health and safety Outlook The outlook is negative because we see a high degree of uncertainty regarding the economic impact of the pandemic, its implications for global car sales, and how it could affect Renault's performance and ability to manage the expected earnings decline and cash outflows. It also reflects Renault's lower financial flexibility to absorb a potential fine due to non-compliance with C02 emissions limits. This could lead to an S&P Global Ratings-adjusted EBITDA margin well below 6% and meaningful cumulative negative FOCF in 2020-2021. Downside scenario We could lower the rating in 2021 if we view it as unlikely that the group is able to achieve an S&P Global Ratings-adjusted EBITDA margin of about 6% in 2022 and FOCF to debt of more than 15% in 2022. Upside scenario We could revise our outlook on Renault to stable if the company restores its EBITDA margin to above 6% and its FOCF to debt to above 15% within the next 18 months. Company Description France-based Renault is the third-largest automaker in Europe, behind Volkswagen AG and PSA Group in terms of the number of cars sold. The company sells cars under six brands: Renault, Dacia, Lada, Renault Samsung Motors, Alpine, and Jinbei & Huasong. Renault formed an alliance with Nissan in 1999 and holds about 43% of the shares in the venture. Renault's main shareholders are the French state (15%), Nissan (nonvoting share of 15%), and Daimler AG (3.1%), while the remainder of its shares are free floating. Issue Ratings - Recovery Analysis www.spglobal.com/ratingsdirect April 9, 2020 3
Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative Key analytical factors - The rating on Renault's unsecured debt is 'BB+', with a '3' recovery rating. The recovery rating is constrained by priority liabilities including factoring, and debt at operating companies. We expect about 65% recovery in the event of a payment default. - Our hypothetical default scenario contemplates a default in 2025 as the company faces a severe downturn, aggressive competition from new and existing competitors, and a loss of market share. - We believe that if the company were to default, it would still have a viable business model because of continued demand for its light and commercial vehicles, its established network of dealerships, and strong brand awareness. For this reason, we expect the company would reorganize and emerge with significant value. Simulated default assumptions - Simulated year of default: 2025 - EBITDA at emergence: €2.2 billion - EBITDA multiple: 5.5x Simplified waterfall - Net enterprise value (after 5% administrative costs): €11.3 billion - Priority claims: €4.2 billion - Total value available to unsecured claims: €7.1 billion - Senior unsecured debt claims: €10.3 billion - --Recovery expectations: 50%-70%; rounded estimate 65% Note: All debt amounts include six months of prepetition interest. Ratings Score Snapshot Issuer Credit Rating: BB+/Negative/B Business risk: Fair - Country risk: Intermediate - Industry risk: Moderately high - Competitive position: Fair Financial risk: Intermediate - Cash flow/Leverage: Intermediate Anchor: bb+ www.spglobal.com/ratingsdirect April 9, 2020 4
Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative Modifiers - Diversification - Portfolio Effect: Neutral (No impact) - Capital Structure: Neutral (No impact) - Financial Policy: Neutral (No impact) - Liquidity: Strong (No impact) - Management and Governance: Fair (No impact) - Comparable Ratings Analysis: Neutral (No impact) Related Criteria - General Criteria: Group Rating Methodology, July 1, 2019 - Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019 - General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 - Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016 - Criteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016 - Criteria | Corporates | General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015 - Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 - Criteria | Corporates | Industrials: Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013 - General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 - Criteria | Corporates | General: Corporate Methodology, 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 Related Research - Renault S.A. Ratings Placed on CreditWatch Negative On Expected Further Depressed Free Cash Flow Generation, Feb. 19, 2020 Ratings List www.spglobal.com/ratingsdirect April 9, 2020 5
Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative
Downgraded; CreditWatch/Outlook Action
To From
Renault S.A.
Issuer Credit Rating BB+/Negative/B BBB-/Watch Neg/A-3
Renault S.A.
Senior Unsecured BB+ BBB-/Watch Neg
Recovery Rating 3(65%)
Commercial Paper B A-3/Watch Neg
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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
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www.spglobal.com/ratingsdirect April 9, 2020 6Research Update: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative
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