November 28, 2017 / 4:49 PM / a year ago

Fitch Upgrades Renault to 'BBB'; Outlook Stable

(The following statement was released by the rating agency) PARIS, November 28 (Fitch) Fitch Ratings has upgraded Renault SA's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB-'. The Outlook on the Long-Term IDR is Stable. The rating action reflects Renault's solid track record in continuously strengthening the group's financial profile, including profitability, cash generation and financial structure. Profitability, notably operating and free cash flow (FCF) margins, is consistent with that of the mid-point of the 'BBB' rating category, according to Fitch's Rating Navigator for automotive manufacturers, and we expect the improvement to be sustained even when the group faces renewed cyclical pressure in some markets. Solid underlying funds from operations (FFO) and continuously positive FCF have enabled Renault's financial structure to strengthen considerably since the financial and automotive crisis in 2008-2009, with FFO-adjusted net leverage falling to less than 0.5x in 2017 from 5.6x at end-2009. We believe that the group's sound liquidity and healthy financial structure provide Renault with more flexibility to navigate the next cyclical downturn or potential financial challenges without significantly impairing its main credit ratios. KEY RATING DRIVERS Resilient Earnings and Cash Flow: Restructuring measures have improved the cost base of Renault, lowered its breakeven point and made it more resistant to a possible downturn and potential financial challenges. Automotive operating margin improved to 4.7% in 2016, from breakeven in 2012, and we expect it to remain above 4.5% in the foreseeable future, after including the dilutive effect from the full consolidation of Avtovaz in 2017. Its FCF margin has remained consistently positive since 2009 at 1.5%-2.5% despite increasing dividends since 2011. Capex has been maintained at adequate levels. Strong Credit Metrics: Net financial debt has fallen substantially since 2009 as a result of positive FCF and asset sales, while earnings and FFO have rebounded in the same period. FFO-adjusted net leverage has declined continuously to 0.3x at end-2016 from 5.6x at end-2009, providing Renault with more flexibility to navigate the sector's next cyclical downturn. We expect consistently positive FCF above EUR1 billion per annum in the next two to three years to help further reduce net leverage. Our projections of FCF margin of 1.5%-2% could, however, come under pressure from accelerated investments and costs to restructure associates. Pressure to Increase Profitability: We project operating margins to remain above 6% between 2017 and 2019. Profitability will be negatively affected by the consolidation of Avtovaz but we expect this to be offset by an acceleration of synergies to be derived from the alliance with Nissan Motor Co., Ltd (BBB+/Stable) and Mitsubishi Motors and further operational measures to match leading margins posted by close peers. This is consistent with Renault's latest medium-term targets to reach a 7% operating margin by 2022, on revenue growing to more than EUR70 billion, including a minimum 5% operating margin over the same period. Benefits from Alliance: While Renault's scale remains modest on a standalone basis, compared with large international peers such as Volkswagen AG, Toyota Motor Corporation and Ford Motor Company, it stands to gain substantial synergies from its alliance with Nissan. Furthermore, the recent addition of Mitsubishi to the alliance will provide further opportunities to share various costs, including manufacturing, purchasing and R&D. This is an important advantage in the context of new powertrains and autonomous driving technologies. Furthermore, dividends received from associates exposed to other markets where Renault is not present provide a diversified source of cash. European Volume Manufacturer: Renault derives the majority of its revenue from the less profitable mass-market small- and medium-sized car segments, where competition is fiercest and price pressure strongest. Renault's sales also retain a bias towards Europe. However, the success of the entry range has been pivotal in compensating for the sales decline of the core Renault models and bolstering profitability and geographical diversification. We also expect the latter to increase as international markets should outperform Europe, leading Renault to derive around 50% of its revenue from outside Europe in the medium-term. Avtovaz Recapitalisation: The cash impact of Avtovaz's recent recapitalisation and debt restructuring is limited for Renault in view of its comfortable liquidity and solid FCF. We view the dilutive effect on Renault's reported operating profit from the consolidation of Avtovaz's weak earnings as an accounting treatment with no major credit impact. Nonetheless, we expect Avtovaz to remain a drag on Renault's earnings and financial profile, despite our projections for stronger operating margins stemming from the recovery of the Russian market. DERIVATION SUMMARY Renault compares well with global automotive manufacturers at the 'BBB' level. On a standalone basis, Renault is somewhat smaller than General Motors Company (GM, BBB/Stable), Ford Motor Company (BBB/Stable) and Hyundai Motor Company (BBB+/Stable) and about the same size as Kia Motors Corporation (BBB+/Stable, aligned with Hyundai, but assessed at 'BBB' on a standalone basis) but Renault's alliance with Nissan (extended to Mitsubishi Motors since its acquisition by Nissan) provides it with substantial economies of scale and synergies. Renault's brand positioning (combining brand value and market share in our Rating Navigator for Automotive Manufacturers) is slightly weaker than its US peers'. However, we believe Renault's relative position should incorporate Dacia, which despite not having a high brand value and leading market shares, provides enhancing product and geographic diversification as well as healthy contribution to profitability. Compared with Hyundai and Kia, we see a much closer comparison in terms of competitive position and brand positioning. Renault's financial profile is broadly comparable with similarly-rated international manufacturers'. Its operating margin is lower than Ford's, GM's and Hyundai's but in line with Kia's; FCF margin and net leverage are broadly similar to Ford, GM and Kia; GM's cash flow from operations (CFO)-to debt is somewhat stronger at above 100% but Renault's 40%-50% compares adequately with Ford's and Kia's. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Industrial operations revenue up about 15% in 2017, including the consolidation of about EUR2.8 billion of Avtovaz revenue and further growth in mid-single digits in 2018-2019; - Automotive core operating margin (excluding Avtovaz) increasing continuously to less than 5.5% by 2019 and Avtovaz's margin improving gradually to about 2%; - Capex remaining at 6.2%-6.5% of industrial sales; and - Dividend payment to increase to more than EUR900 million by 2019 from EUR700 million. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Operating margin remaining above 5% on a sustained basis. -FCF margin comfortably above 2% on a sustained basis. -CFO/lease adjusted debt above 60%. -FFO-adjusted net leverage remaining below 0.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Operating margin falling below 3% on a sustained basis. -FCF margin below 1% on a sustained basis. -CFO/lease adjusted debt below 30%. -FFO-adjusted net leverage increasing above 1.5x. LIQUIDITY Healthy Liquidity: Liquidity is ample, including EUR11.4 billion of readily available cash and liquid investments for industrial operations at end-2016, following Fitch's adjustments for minimum operational cash of about EUR1.4 billion and not readily available financial assets. In addition, committed credit lines of EUR3.3 billion at the automotive division and EUR4.6 billion at the sales financing segment, were undrawn at end-2016. Renault maintains a prudent financial policy, including a reported net cash position around EUR5 billion and liquidity reserves of at least 20% of revenue through 2022. Marc Ladreit de Lacharriere has an equity interest of greater than 5% in or serves on the board of Renault S.A. Mr. de Lacharriere is the controlling shareholder of Fimalac, S.A., which owns a 20% equity interest in Fitch. Contact: Principal Analyst Aurelien Jacquot Associate Director +33 1 44 29 91 37 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 8411 Fitch Ratings Espana S.A.U. Diagonal 670 08028 Barcelona Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments - Fitch considers the financial profile of Renault's industrial operations in its analysis as financial services debt is expected to be repaid by financial services receivables. However, due to an undercapitalisation of the group's financial services business under Fitch's methodology, we adjust the debt of the industrial operations by EUR1 billion to reduce financial services debt-to-equity to 7x from the reported 9x at end-2016. Fitch also adjusts cash balances for minimum operational cash requirements of about EUR1.4 billion, adds an 8x multiple of operating leases to debt, totalling EUR1.8 billion, and adds a further EUR0.8 billion to debt with respect to de-recognised trade receivables. 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