DBRS Downgrades Renault to BBB (low), Trend Remains Negative

DBRS has today downgraded the Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) to BBB (low) from BBB (high). The downgrade reflects ongoing losses at the Company’s automotive operations amid weak industry conditions that have caused the Company’s financial profile to deteriorate to a level no longer commensurate with the formerly assigned rating. The trend remains Negative, as DBRS expects automotive markets to remain weak next year in Renault’s core European region (which typically accounts for 60% of the Company’s sales) as most vehicle scrappage programs are phased out across the continent.

DBRS had assigned a Negative trend to the rating in March (for further details please see DBRS’s press release dated March 3, 2009), citing a sharp increase in debt levels as automotive demand dropped precipitously in the last quarter of 2008. Through the first half of 2009, despite the Company having generated positive free cash flow through significant inventory reductions (the extent of which is unlikely to be repeated in the second half of the year), DBRS notes that Renault’s gross leverage (i.e., gross debt-to-total capital) has increased further. (On a net basis, leverage is roughly constant given higher cash balances. However, DBRS typically stresses the gross leverage metric.)

The automotive downturn in Europe has been somewhat moderated this year through the implementation of vehicle scrappage programs, which have also proportionately favoured sales of small vehicles in light of their increased affordability. However, despite Renault’s relative concentration in the entry and small car segments, DBRS notes that the Company’s European market share through the first half of 2009 declined slightly relative to year-end 2008 levels. This is in contrast to Fiat S.p.A. (rated BBB (low) – Negative), which achieved share gains through the first six months of this year to overtake Renault as Europe’s fifth largest automotive manufacturer in terms of light vehicle registrations.
Going into 2010, DBRS expects conditions in Europe to remain weak, as no significant economic recovery is forecast. Inherent automotive demand will likely decrease, given the substantial level of sales pulled forward this year by the incentive programs. As such, Renault’s operating performance is expected to remain lacklustre, thereby likely preventing any significant improvement in its financial profile. DBRS also notes that equity contributions from Nissan Motor Co., Ltd. (Nissan; rated A (low) – Negative) and AB Volvo (Volvo; rated A (low) – Negative) are projected to be much reduced over the medium term relative to historical averages.

However, the revised rating continues to reflect Renault’s sound business profile as one of Europe’s leading automotive companies with a strong foothold in its native French market. In addition, through its strategic alliance with Nissan, the companies together form the world’s fourth largest automaker, generating the economies of scale increasingly required in what is an intensely competitive industry. The Company’s liquidity position remains adequate and has actually improved relative to 2008 year-end levels, with cash balances totalling EUR3.4 billion as of June 30, 2009. In March 2009, the automotive operations received a five-year EUR3 billion loan from the French government to bolster liquidity. DBRS notes that the French government maintains a significant fifteen percent ownership interest in the Company, with further government support likely if deemed necessary. Renault also continues to hold a twenty percent equity stake in Volvo that could be divested to further enhance liquidity.

Recent introductions of the new Mégane and Scénic models and an overall improving product cadence should help Renault defend its market share over the near term, although sales levels will continue to reflect the significant industry headwinds. Additionally, ongoing efficiency programs will alleviate the expected weak performance and support cash flow. However, the rating could be further lowered in the event that there is significant additional cash burn and debt levels continue to increase unabated.

Notes:
All figures are in euros unless otherwise noted.

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