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

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt ratings of Renault S.A. (Renault or the Company) at BBB (low), with the trends remaining Stable. The rating confirmation incorporates Renault’s adequate business profile as an original equipment manufacturer with an established automotive market position in Europe and a strong alliance with Nissan Motor Co., Ltd. (Nissan, rated BBB (high); 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 continued sound liquidity position, with Renault’s financial profile (particularly its balance sheet) having been significantly restored through the 2010 sale of most of its equity stake in Volvo AB (Volvo), the proceeds of which were primarily applied toward debt reduction with the Company also effecting further significant repayments of automotive indebtedness in 2011.

DBRS notes that, while operating profit has weakened over the twelve-month period engine June 30th 2012, the Company has demonstrated earnings resiliency, with Renault’s core automotive operations remaining nominally profitable amid challenging conditions in the Company’s core European market, particularly in Southern European countries where Renault has a relatively high presence. The Stable trend incorporates DBRS’s assumption that projected earnings will be roughly flat over the near term, with the Company having sufficient liquidity to weather the ongoing downturn in European automotive conditions. Moreover, ongoing headwinds in Europe are projected to be essentially offset by the Company’s continued cost-cutting initiatives and, to a lesser degree, by increasing growth in emerging markets.

The 2011 operating performance of Renault’s automotive division was essentially flat relative to 2010 levels. Despite ongoing weakness in the Company’s core European market, global unit sales increased moderately year-over-year, with declines in Europe being more than offset by gains achieved in other markets. However, the higher volumes and ongoing efficiency gains were effectively offset by adverse mix/pricing effects, as well as by increased raw material costs. While the automotive operating margin of 1% was lacklustre, DBRS notes that such performance is nonetheless reasonable amid very challenging conditions in Europe, which continues to account for well more than half of Renault’s global volumes. Through the first half of 2012, the Company’s performance weakened somewhat as conditions in Western Europe continued to deteriorate, although DBRS observes that the automotive business remained nominally profitable. Moreover, automotive results have been considerably bolstered by solid profitability of Renault’s financial services division as a result of higher volumes and low credit loss provisions.

In line with a rather resilient earnings performance, DBRS observes that Renault has managed to avoid burning significant cash amid challenging market conditions in Europe, with the automotive operations generating positive net free cash flow in recent years. DBRS also notes that the balance sheet of the automotive division was significantly restored through Renault’s sale in October 2010 of its Series B shares in Volvo, generating proceeds of EUR 3 billion. These proceeds were 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. As a function of the above, Renault’s credit metrics are commensurate with the current rating.

Renault’s liquidity position remains sound, with the automotive operations’ cash and available credit lines exceeding EUR 11 billion as of June 30, 2012. The Company’s residual stake in Volvo represents a further potential source of liquidity; moreover, while Nissan remains a core strategic investment that would in all likelihood not be fully divested, DBRS also notes that Renault could nonetheless reduce its sizeable equity stake therein in order to further enhance liquidity.

While DBRS recognizes that the Company’s performance remains heavily dependent on Europe, Renault’s geographic diversification has nonetheless been progressively increasing. International sales (i.e., those outside of Europe) grew to 43% of total revenues in 2011 (from 37% in the prior year) and have exceeded 40% through the first six months of the current year. The Company is currently targeting a level of 45% by 2013. While Europe remains burdened by the ongoing fiscal challenges of various member nations, Renault anticipates offsetting flat or 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, Russia’s leading automotive manufacturer, while Renault-Samsung (80.1% owned by the Company) is among the market leaders in South Korea. Furthermore, through its alliance (the Alliance) with 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 the joint efforts of the Alliance, which was expanded in 2010 through 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 both companies. In response to the global economic downturn, increased emphasis was placed on deriving synergies, to an estimated total of at least EUR 1.5 billion in 2011. Product development costs will also be lowered through the Company’s development of its modular design approach, which will increase the amount of standard parts across Renault’s vehicles and platforms.

DBRS expects the Company’s rating to stay constant over the near to medium term. While conditions in its 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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