DBRS Confirms Renault at BBB (low), Trend Still Negative

DBRS has today confirmed the Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) at BBB (low). The ratings confirmation incorporates the Company’s moderate recovery in earnings following significant erosion therein from 2008 through 2009 due to the global automotive downturn. DBRS also recognizes that the Company’s financial profile has been considerably strengthened of late, with the Company generating significant net free cash flow in 2009. Additionally, in October of this year, Renault sold most of its equity stake in Volvo AB (Volvo); the proceeds of which are to be applied toward debt reduction. This progress notwithstanding, the trend on the ratings remains Negative, reflecting continuing difficult conditions in Renault’s core European market.

DBRS notes that the worst of the downturn would appear to have passed, with a moderate, protracted recovery of the industry’s developed markets underway. However, significant near-term headwinds persist in Europe (by far Renault’s most important sales region, accounting for close to two-thirds of its 2009 global unit sales). Vehicle scrappage programs initiated in 2009 proved quite successful in offsetting the drop in demand. Sales also held fairly firm through the first half of 2010, reflecting delays in vehicle registrations and the gradual phasing-out of these incentive programs. However, industry volumes in the third quarter dropped by approximately 13% year-over-year (October sales declined by 16% year-over-year), with sales for the rest of the year subject to considerable pressure in light of the demand pulled forward by the scrappage schemes. This is further exacerbated by significant economic headwinds across the continent associated with the fiscal challenges of certain member nations. DBRS acknowledges that the Company has outperformed its peers and achieved market share gains in Europe due to a strengthening product cadence, particularly the successful renewal of the C-segment Mégane model. However, DBRS also notes that the Company benefited considerably from the vehicle scrappage programs, which proportionately boosted sales of small cars (in which Renault specializes) due to their increased affordability.

Through the remainder of 2010, the Company anticipates offsetting expected weaker sales in Europe through ongoing gains in emerging markets. DBRS notes that the Company is well positioned in Central Europe through Dacia. Additionally, Renault holds a 25% stake in AvtoVAZ, which is Russia’s leading automotive manufacturer. Apart from Eastern Europe, Renault-Samsung (80.1% owned by the Company) is among the market leaders in South Korea, and through its alliance (the Alliance) with Nissan Motor Co., Ltd. (Nissan), Renault has indirect exposure to China and India, where Nissan enjoys a strong presence.

The Company remains focused on cost reductions, particularly through joint efforts of the Alliance. In response to the global economic downturn, increased emphasis was placed on deriving synergies, which exceeded EUR 1.5 billion in 2009; additional new synergies in excess of EUR 1 billion are targeted for 2010. In April, the Alliance announced a strategic cooperation with Daimler AG aimed at sharing technology costs and best practices as well as increasing the scale and capacity utilization of all companies.

DBRS expects the Negative rating trend to be resolved by mid-2011. DBRS notes that Renault has forecast free cash flow of EUR 700 million for 2010. Given EUR 1.4 billion (as calculated by the Company) in free cash flow generated in the first half of the year, this implies negative free cash flow of EUR 700 million in the final six months. In the event that Europe’s economic headwinds dissipate and Renault mounts a sustained recovery based on that continent’s resumed growth, bolstered by an increasing presence in emerging markets, DBRS could change the trend of the rating to Stable from Negative (taking into account such developments in conjunction with Renault’s improved financial profile). However, should Europe’s economic headwinds persist and sufficiently derail the recovery of its automotive industry such that Renault incurs renewed losses, this could lead to negative rating actions.

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

This rating did not include issuer participation and is based solely on publicly available information.