DBRS Confirms Renault S.A. at BBB (low), Trend Now Stable

DBRS has today confirmed the Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) at BBB (low). The rating confirmation incorporates Renault’s adequate business profile as an original equipment manufacturer with an established automotive market position in Western Europe and a strong alliance with Nissan Motor Co., Ltd. (Nissan, rated BBB (high); see separate press release). (While the alliance with Nissan benefits Renault in terms of synergies and various strategic areas, the companies’ respective ratings are not closely linked). The confirmation also reflects the Company’s moderate recovery in earnings following significant erosion therein from 2008 through 2009 due to the downturn in the global automotive markets, with Renault’s financial profile (particularly its balance sheet) also being significantly restored through the sale of most of its equity stake in Volvo AB (Volvo); the proceeds of which were primarily applied toward debt reduction.

In view of these developments, the trend on the rating has been changed to Stable from Negative. While DBRS acknowledges that significant headwinds persist in Renault’s core European market, these are expected to be essentially offset by the Company’s ongoing cost-cutting initiatives and, to a lesser degree, by increasing growth in emerging markets. DBRS notes that Renault achieved EUR 580 million in cost reductions in 2010, with the Company seeking to reduce costs further by a cumulative 12% from 2011 through 2013.

The Company’s performance in 2010 improved considerably relative to 2009, when Renault’s automotive division incurred significant losses given the global industry downturn. In line with a strengthening product cadence, DBRS notes that the Company achieved share gains across most of its major markets, with the exception of Germany. DBRS also notes that Renault has continued to progressively improve the overall quality of its vehicles, with warranty costs decreasing by 57% in the 2006 through 2010 time period. Notwithstanding higher vehicle sales, negative mix and pricing effects undermined earnings. However, ongoing cost-cutting efforts served to significantly narrow losses, with the operating profit of the automotive division approaching breakeven levels. Through the first half of 2011, the Company’s positive performance trend continued in line with higher vehicle sales as Renault achieved further market share gains across many markets Despite weaker pricing and adverse foreign exchange effects, year-over-year operating profit of the automotive division would have been materially higher absent supply constraints attributable to the Great East Japan Earthquake of March 11, 2011.

In addition to the Company’s moderate outperformance of the industry and associated cash flow generation, DBRS notes that the balance sheet of the automotive division has been significantly restored through Renault’s sale in October 2010 of its Series B shares in Volvo, generating proceeds of EUR 3 billion. These proceeds have been essentially applied toward debt reduction including, among other items, the Company’s full repayment (through paydowns of EUR 1 billion and EUR 2 billion in 2010 and 2011, respectively) of the EUR 3 billion French government loan well ahead of its March 2014 maturity. Accordingly, Renault’s credit metrics have reverted to levels well commensurate with the current rating. In addition to the Company’s sound balance sheet, DBRS notes that Renault’s significant equity stake in Nissan could be reduced in order to further enhance liquidity.

DBRS recognizes that the Company’s performance remains heavily dependent on Europe. However, DBRS also notes that Renault’s geographic diversification has been progressively increasing. International sales (i.e., outside of Europe) increased to 37% of total revenues in 2010 (from a level of 34% the prior year) and have exceeded 40% through the first six months of the current year, with the Company targeting a level of 45% by 2013. While Europe remains burdened by the ongoing fiscal challenges of various member nations, Renault anticipates that it will offset flat/weaker sales in Europe by achieving gains in emerging markets. DBRS notes that the Company is well positioned in Central Europe through its Dacia brand. Renault also holds a 25% stake in AvtoVAZ, which is Russia’s leading automotive manufacturer, and Renault-Samsung (80.1% owned by the Company) is among the market leaders in South Korea. Furthermore, 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 also continues to focus on cost reductions, particularly through joint efforts of the Alliance, which was expanded last year through the strategic cooperation (as well as modest cross-shareholdings) with Daimler AG (Daimler) aimed at sharing technology costs and best practices, as well as increasing the scale and capacity utilization of the companies. In response to the global economic downturn, increased emphasis was placed on deriving synergies, which are estimated to have totalled approximately EUR 2 billion in 2010 (half of which were new synergies). Product development costs will also be lowered through the Company’s development of its modular design approach, which will increase the number of standard parts across Renault’s vehicles and platforms.

DBRS expects the rating to be constant over the near to medium term. While conditions in the Company’s core European market remain uncertain, this should be essentially offset by projected efficiencies, supplemented by ongoing growth in emerging markets. However, in the event that volumes in Europe contract sharply and place material downward pressure on Renault’s earnings, this could potentially have negative implications for the rating.

Notes:

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

The applicable methodologies are Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.