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 trend 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 A (low); 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 meaningfully restored in recent years, in line with constant free cash flow generation and bolstered considerably by Renault’s now-complete divestiture of its former equity stake in Volvo AB (Volvo), the Series B shares having been sold in 2010 and the Series A shares sold in December of last year. As a function of the above, Renault’s automotive operations as of year-end 2012 (and as of June 30, 2013) boasted a net cash position, with 1999 being the last year-end when industrial operations were cash-positive.

DBRS recognizes that the Company’s operating profit has weakened in 2012 through the first half of 2013. However, Renault’s earnings performance is nonetheless deemed to be somewhat resilient amid very 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 earnings will likely improve slightly from 2014 and onward, as automotive conditions in the Company’s core European market have likely finally bottomed out this year, although DBRS cautions that the recovery in that continent will likely prove very protracted. This notwithstanding, ongoing growth in Renault’s international (i.e., outside of Europe) market amid further cost-cutting initiatives should further support future earnings performance.

The 2012 operating performance of Renault’s automotive division was somewhat weaker relative to 2011 levels as global unit sales decreased materially year over year, with declines in Europe only being partly offset by ongoing gains achieved in other markets. Moreover, the lower volumes were exacerbated by weaker price/mix effects, as well as by foreign exchange headwinds, with these negative factors being only partly offset by Renault’s continued cost-cutting initiatives (which amounted to EUR 200 million in the first half of 2013 and have totalled approximately EUR 1.3 billion over the eighteen-month period ending June 30, 2013). As a result of the above, Renault’s automotive segment incurred a negative operating margin of 0.7% in 2012. Through the first half of 2013, the operating performance of the automotive segment was essentially at break-even levels. DBRS notes that such performance is nonetheless reasonable, given the very challenging conditions in Europe. Moreover, the Company remained profitable on a consolidated basis, as automotive results continued to be considerably bolstered by the solid profitability of Renault’s financial services division, following higher volumes and low credit loss provisions.

Amid the above-cited earnings performance, DBRS observes that Renault has managed to avoid burning cash as the automotive operations generated positive net free cash flow in recent years. Moreover, taking into account the net cash position of the industrial operations, the Company’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 12.6 billion as of June 30, 2013. With the Company having fully divested its former equity stake in Volvo, DBRS notes that Renault’s ownership position in Nissan’s represents a further potential source of liquidity; while Nissan remains a core strategic investment that would, in all likelihood, not be fully divested, Renault could nonetheless reduce its sizeable equity stake therein in order to further enhance liquidity.

DBRS recognizes that the Company’s performance remains heavily dependent on Europe; however, Renault’s geographic diversification has nonetheless been progressively increasing. International sales (i.e., those outside of Europe) grew to 50% of total revenues in 2012 (from 43% in the prior year), with this level persisting through the first half of this year. Renault anticipates offsetting lackluster 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.

Moreover, after a pronounced uninterrupted decline beginning in 2008, it would appear that industry conditions in Europe have turned the corner at last. While annual regional volumes for 2013 are slated to be lower for a sixth consecutive year, monthly regional volumes have nonetheless exhibited year-over-year growth on three occasions this year, including successive increases in October and November. As such, it would appear that the European automotive downturn has finally bottomed out. While the recovery going forward will likely prove very gradual and protracted, any resumption of growth in the region should serve to benefit Renault’s future earnings performance.

DBRS also notes that the Company’s recent product introductions have been quite well received, not only in Europe but across other markets, with the Clio IV performing solidly and the Dacia brand achieving significant recent sales increases on the strength of the recent renewals of the Sandero and Logan models.

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 synergies, with the Alliance deriving at least EUR 2.6 billion in 2012. 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, with Renault’s earnings performance likely benefiting from modestly improving conditions in Europe and ongoing growth across other international markets, bolstered by the Company’s ongoing cost reduction efforts, as well as synergies derived from the Alliance. However, in the event that Renault’s earnings come under material downward pressure (either as a result of lackluster product reception culminating in market share losses/lower sales or stalled progress with respect to the Company’s ongoing cost reduction efforts), such that the Company’s credit metrics deteriorate to weaker levels vis-à-vis the assigned rating, this could potentially result in negative rating implications.

Notes:
All figures are in Euros unless otherwise noted.

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.

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

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