DBRS Changes Trend on Renault’s Ratings to Negative

DBRS has today changed the trend on the BBB (high) Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) to Negative from Stable. The trend change reflects the Company’s weak operating results and sharp increase in debt levels over the past six months attributable to sharply deteriorating market conditions, most notably in Europe. The increase in leverage is greater than that anticipated by DBRS. Furthermore, given the weak market conditions, there is an increased potential that credit protection measures will weaken to levels that are no longer commensurate with Renault’s current BBB (high) ratings.

DBRS notes that the increased leverage is due to three primary factors: high working capital absorption; Renault’s investment in AvtoVaz; as well as adverse currency developments related to the strengthening of the yen associated with debt incurred to cover the Company’s investment in Nissan Motor Co., Ltd. (Nissan). The use of working capital in 2008 amounted to a very significant EUR 2.7 billion. DBRS notes that the majority of the working capital usage occurred in the second half of year, as the Company’s markets underwent a severe downturn, most notably in Europe. However, DBRS also recognizes that Renault was more aggressive in cutting production than many other automotive manufacturers; in the fourth quarter, the Company reduced volumes by 45% year-over-year. As such, inventories as of year-end 2008 were 11% lower relative to prior year levels.

Given the much reduced activity and associated high use of working capital, Renault’s industrial net debt as of year-end 2008 amounted to EUR 7.9 billion, which represents a sharp increase from the EUR 2.1 billion reported as of year-end 2007. Additionally, the Company’s funding needs for 2009 total EUR 3.5 billion, primarily for refinancing purposes. However, the Company’s liquidity position continues to be adequate. As of December 31, 2008, Renault’s automotive division had a cash position of EUR 1.1 billion. This is supplemented by committed credit lines of EUR 4.2 billion that do not have any rating triggers or covenants that could impede availability. The French government has also recently agreed to provide a five-year EUR 3.0 billion loan that is to be made available this month. DBRS also notes that the Company’s liquidity is further bolstered by its 20% equity stake in AB Volvo, as well as by dividend streams from Nissan.

Renault, as with many other automotive manufacturers, has initiated several measures to help it withstand the current downturn. The Company is implementing cost reductions in the form of lower labour costs and reduced R&D outlays. Additionally, the Company has significantly cut production, with capital expenditures in 2009 also slated to be reduced by 20% relative to prior year levels.

Despite weak markets that are projected to persist over the near term and pressure earnings, DBRS expects Renault’s cash burn to moderate. In light of the Company’s relatively lower inventories, production will be more closely aligned with demand levels, which may rebound somewhat in the second half of the year. This would reverse the working capital absorption, resulting in a source of cash for the Company. If this is achieved and Renault continues to perform reasonably well amid difficult market conditions, the trend of the ratings could be returned to Stable. However, in the event that the recent losses continue unabated and debt levels increase further, this would likely have negative rating implications.

Notes:
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos and Auto Parts) rating.

This rating is based on public information.