DBRS Confirms Renault S.A. at BBB (low), Trend Changed to Positive from Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) at BBB (low). The confirmation reflects Renault’s sound business profile as an original equipment manufacturer (OEM) with an established auto market position in Europe and the strength of the Renault-Nissan Alliance (the Alliance) with Nissan Motor Co., Ltd. (Nissan; rated A (low) with a Stable trend by DBRS). (While the Alliance benefits Renault in terms of synergies and in various strategic areas, the companies’ respective ratings are not closely linked.) The trend on the ratings has been changed to Positive from Stable, reflecting a progressive material improvement in the Company’s financial risk profile in line with not only recovering volumes in Renault’s core European markets but also ongoing cost reductions achieved in considerable part because of the Alliance. As a result, Renault’s credit metrics have migrated to levels that exceed the current ratings. Moreover, Renault’s business risk profile has been modestly positively affected by the ongoing solid growth of its Dacia brand, whose total sales now exceed 500,000 units, accounting for approximately 20% of the Company’s global volumes.

Renault’s earnings performance in 2015 through H1 2016 continued to improve, reflecting, as mentioned above, ongoing cost-cutting efforts in addition to meaningful volume increases in Europe. Moreover, volumes in international territories (i.e., outside Europe) also improved in 2016, notwithstanding ongoing headwinds across some notable emerging markets, including Russia. DBRS acknowledges the Company’s intention to increase its ownership position in Russian auto manufacturer AvtoVAZ (by way of its participation in AvtoVAZ’s forthcoming recapitalization program and associated rights issue), with Renault expected to assume a majority stake and consolidate AvtoVAZ in the near term. While this is expected to result in a cash outflow for Renault of up to approximately EUR 350 million (DBRS estimate) and the assumption of roughly EUR 1.5 billion of additional (AvtoVAZ) indebtedness, DBRS notes that such amounts remain readily absorbed by the Company’s sound financial profile and solid liquidity position. Moreover, AvtoVAZ’s operations and sales remain rather modest in scale relative to Renault’s total industrial operations. Finally, while conditions in the Russian auto market remain weak and burdened by ongoing geopolitical concerns (thereby jeopardizing any underlying growth assumptions), DBRS is nonetheless of the opinion that sales volumes in the region have likely approached bottom levels and further notes the meaningfully lower losses incurred by AvtoVAZ thus far in 2016. (Taking into account the consolidation of AvtoVAZ, while credit metrics are slightly softer on a pro forma basis, they nonetheless persist at levels in excess of the current ratings.) In contrast to the above, DBRS also notes that Renault is estimated to receive proceeds in the range of EUR 1.1 billion to EUR 1.2 billion in connection with its sale of Nissan shares, to maintain the Company’s ownership position of Nissan constant at a level of 43.4% notwithstanding the latter’s recently completed sizable share repurchase program.

The Positive trend on the ratings incorporates DBRS’s assumption that Renault’s earnings momentum is likely to persist given anticipated moderate sales growth, reflecting Europe’s continuing recovery amid likely flat to nominally higher volumes in emerging markets, bolstered by ongoing efficiencies achieved through the Alliance. Absent any deterioration in earnings or significant cash outflows attributable to AvtoVAZ, DBRS anticipates upgrading the ratings in the coming 12- to 18-month period. DBRS is aware that Renault, as is similarly the case with several OEMs, is currently facing investigations in connection with the diesel emissions of certain models. DBRS has not anticipated (nor incorporated into this rating action) any materially negative consequences for Renault as a result of such investigations, although unexpected, substantially adverse outcomes could potentially trigger a review of the ratings.

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.

The applicable methodology is Rating Companies in the Automotive Manufacturing Industry (October 2016), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.