Download French Automaker Renault Outlook Revised To Positive On Stronger

Research Update:
French Automaker Renault Outlook
Revised To Positive On Stronger
Earnings And Less Debt; 'BBB-/A-3'
Ratings Affirmed
Primary Credit Analyst:
Vincent Gusdorf, CFA, Paris (33) 1-4420-6667; [email protected]
Secondary Contact:
Alex P Herbert, London (44) 20-7176-3616; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
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Research Update:
French Automaker Renault Outlook Revised To
Positive On Stronger Earnings And Less Debt;
'BBB-/A-3' Ratings Affirmed
Overview
• Rising earnings and declining debt should enable Renault to sustain
stronger-than-expected credit ratios.
• We are therefore revising our outlook on Renault to positive from stable
and affirming the 'BBB-/A-3' ratings.
• The positive outlook on Renault reflects our opinion that a conservative
financial policy will support credit metrics, and that the profitability
of its automotive operations will continue to improve on the back of
additional productivity gains and new car launches.
Rating Action
On April 19, 2016, Standard & Poor's Ratings Services revised its outlook on
French automotive manufacturer Renault S.A. to positive from stable. At the
same time, we affirmed our 'BBB-' long-term and 'A-3' short-term corporate
credit ratings on the company.
Rationale
The outlook revision reflects our view that Renault will sustain
higher-than-expected credit ratios over the next two years and that its
business risk profile will continue to improve.
Shrinking debt and an expanding earnings base should fuel a marked improvement
in Renault's credit ratios in the coming years. Renault has increased its
EBITDA by €0.7 billion and reduced its debt by €0.5 billion over the past two
years. As a result, its funds from operations (FFO) to debt has risen to 120%
from 76% between 2013 and 2015, and we believe that it should exceed 100% in
the coming years. We also forecast that Renault will sustain healthy cash flow
generation, with a free operating cash flow (FOCF)-to-debt ratio of about 50%.
We think that the sale of Nissan shares should more than offset cash outflows
coming from a possible recapitalization of the Russian subsidiary AvtoVAZ.
Although the cost of this operation is currently difficult to assess,
Renault's management indicated that it would not exceed a few hundred million
euros. At the same time, we calculate that Nissan's share buyback program
should generate about €1 billion of proceeds for Renault, as it intends to
sell some of its shares to maintain its 43.4% stake.
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Research Update: French Automaker Renault Outlook Revised To Positive On Stronger Earnings And Less Debt;
'BBB-/A-3' Ratings Affirmed
We've also taken into account our belief that Renault's business risk profile
is strengthening. Its Standard & Poor's adjusted EBITDA margin rose to 8.8% in
2015 from 7.6% in 2014, thanks mostly to an increase of the automotive
division's profitability. Although Renault benefited from a supportive
operating environment last year, notably the significant rebound of the
European car market and favorable exchange rates, we think that the
improvement in profitability is also structural. In particular, we note that
the Monozukuri cost-cutting program generated €1.4 billion of savings over the
past two years. For the next couple of years, we believe that profitability
will continue to improve, albeit more gradually as additional productivity
gains become increasingly difficult to achieve. Still, the pipeline of new
vehicles is supportive, with 10 new vehicles to be launched in 2016.
Our base-case scenario relies on the following assumptions:
• An annual increase in car sales of about 2%-3% annually over the next two
years. We expect the recovery of the European market to continue,
supported by mild economic conditions, with a real GDP growth of 2% in
2016 and 1.9% in 2017. This should more than offset the poor performance
of Russia (real GDP growth of 0.3% in 2016 and 1.8% in 2017) and Brazil
(negative 3% in 2016 and 1% in 2017). We also expect sound performances
in India owing to a good product mix. Furthermore, China, from which
Renault is almost absent, and Iran, provide upside potential.
• Annual revenue growth should reach about 3%-5% over the next two years,
driven by a supportive pipeline of new vehicles and rising sales to
partners.
• A gradual increase in the profitability of the automotive division thanks
to additional productivity gains.
• A stabilization of working capital.
• A moderate increase in capex to about 7% of revenues to finance
investments in China and new projects.
• A prudent financial policy over the next two years, with stable
investment trends, a gradual increase in dividends, and no large
debt-financed acquisition.
• A €1 billion cash inflow coming from the sale of Nissan shares, as part
of its share buyback program.
• A moderate cash outflow related to the recapitalization of the Russian
subsidiary AvtoVAZ.
Based on these assumptions, we arrive at the following credit measures:
• An adjusted EBITDA margin of moving gradually to 9%-10% in the next two
years.
• An FFO-to-debt ratio above 100%.
• A debt-to-EBITDA ratio of less than 1x.
• An FOCF-to-debt ratio of about 50%.
Liquidity
The short-term rating on Renault is 'A-3'. We view Renault's liquidity as
strong, based on our estimate that its ratio of liquidity sources to uses will
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Research Update: French Automaker Renault Outlook Revised To Positive On Stronger Earnings And Less Debt;
'BBB-/A-3' Ratings Affirmed
exceed 2x in the next 24 months. The company's well-established relationships
with its banks and its prudent risk management also underpin our assessment,
among others supporting factors.
We calculate that sources of liquidity amount to about €18 billion for the 12
months started Dec. 31, 2015, comprising:
• €9.7 billion of cash and cash equivalents held in the automotive
division, after applying a 15% haircut;
• €3.3 billion in undrawn bilateral committed credit lines maturing in more
than 12 months at the automotive division;
• About €4.4 billion of reported FFO, excluding the contribution of RCI
Banque, forecast over the next 12 months; and
• About €1 billion of proceeds from the sale of Nissan shares.
For the same time period, we estimate €8 billion in liquidity sources,
comprising:
• €4.2 billion in automotive debt maturing in less than one year;
• About €3.3 billion of capex; and
• About €0.8 billion of dividends.
The undrawn credit facilities have no financial covenants. We note that the
sales financing division RCI Banque had €15.4 billion of debt maturing over
the next 12 months at year-end 2015. We expect this subsidiary will have
sufficient liquidity to cover its funding needs.
Outlook
The positive outlook on Renault reflects our opinion that a conservative
financial policy will support strong credit metrics and that the profitability
of its automotive operations will continue to improve on the back of
additional productivity gains and new car launches. As a result, we expect
Renault's Standard & Poor's adjusted EBITDA margin to rise to about 9%-10% by
2017.
Upside scenario
We may raise our ratings on Renault over the next 12-18 months if the company
builds a track record of strong credit ratios and good profitability levels.
This would require that Renault maintain FFO to debt well above 60%, with only
a limited increase in shareholder remuneration and no large debt-financed
acquisitions. An upgrade would also require that profitability remained on an
upward trend and that the strength of the European market mitigated the
decline of the markets in Brazil and Russia.
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Research Update: French Automaker Renault Outlook Revised To Positive On Stronger Earnings And Less Debt;
'BBB-/A-3' Ratings Affirmed
Downside scenario
We could revise the outlook to stable if Renault's profitability started to
decline. Such a scenario could unfold if, for instance, the European market
unexpectedly deteriorated or if the company was unable to contain costs. We
would also revise the outlook to stable if FFO to debt fell below 60%,
possibly because of a debt-financed acquisition or an increase in shareholder
remuneration.
Ratings Score Snapshot
Corporate Credit Rating: BBB-/Positive/A-3
Business risk: Fair
• Country risk: Intermediate
• Industry risk: Moderately high
• Competitive position: Fair
Financial risk: Minimal
• Cash flow/Leverage: Minimal
Anchor: bbbModifiers
• Diversification: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Strong (no impact)
• Financial policy: Neutral (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Neutral (no impact)
Related Criteria And Research
• Standard & Poor's National And Regional Scale Mapping Tables, Jan. 19,
2016
• The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers
, Dec. 14, 2015
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Dec. 16, 2014
• National And Regional Scale Credit Ratings, Sept. 22, 2014
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Key Credit Factors For The Auto And Commercial Vehicle Manufacturing
Industry, Nov. 19, 2013
• Group Rating Methodology, Nov. 19, 2013
• Corporate Methodology, Nov. 19, 2013
• Methodology: Management And Governance Credit Factors For Corporate
Entities And Insurers, Nov. 13, 2012
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
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Research Update: French Automaker Renault Outlook Revised To Positive On Stronger Earnings And Less Debt;
'BBB-/A-3' Ratings Affirmed
• 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
Ratings List
Outlook Action; Ratings Affirmed
Renault S.A.
Corporate Credit Rating
Senior Unsecured
Commercial Paper
To
From
BBB-/Positive/A-3
BBBA-3
BBB-/Stable/A-3
BBBA-3
Additional Contact:
Industrial Ratings Europe; [email protected]
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. Complete ratings information is available to subscribers of
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ratings affected by this rating action can be found on Standard & Poor's
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