DBRS Upgrades Renault S.A. to BBB from BBB (low), Trend Changed to Stable

DBRS Limited (DBRS) upgraded the Issuer Rating and Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) to BBB from BBB (low). The trend on the ratings has been changed to Stable from Positive. The rating action reflects the Company’s improved operating earnings over the past couple of years, which has caused its current financial risk assessment (FRA) to exceed the previously assigned ratings. The ratings continue to incorporate Renault’s sound business risk assessment as an original equipment manufacturer with an established auto market position in Europe and the fact that its competitive position is strengthened by the alliance with Nissan Motor Co., Ltd. (Nissan) and the recent addition of Mitsubishi Motors Corporation (collectively, the Alliance). DBRS notes, however, that while the Alliance benefits Renault in terms of synergies and in various strategic areas, the companies’ respective ratings are not closely linked.

At the time of its last annual review, DBRS indicated that Renault’s ratings would likely be subject to an upgrade pending continuation of the Company’s earnings momentum and absent any meaningful deterioration in its FRA resulting from its increased ownership position in Russian auto manufacturer AvtoVAZ and subsequent consolidation thereof (as of December 28, 2016). However, DBRS notes that the cash outflows and additional indebtedness associated with the AvtoVAZ acquisition were significantly offset by proceeds from Renault’s sale of Nissan shares (the Company’s ownership position in Nissan remains constant at 43.4% as a function of the Nissan’s sizable share repurchase program implemented in late 2016). Moreover, in 2016 and in H1 2017, Renault’s growth in earnings/cash flow generation persisted primarily because of ongoing global sales gains and cost reduction activities, with these positive factors being only partly offset by adverse foreign exchange developments. As a function of the above, Renault’s credit metrics as of H1 2017 remain solid even in the context of the newly upgraded ratings.

Going forward, DBRS notes that automotive market conditions in aggregate remain rather reasonable. While the industry faces headwinds in the form of increasing product development and emissions compliance costs, the Company is aiming to considerably offset these by way of increasing efficiencies (significantly attributable to the Alliance) and ongoing sales growth. DBRS recognizes that Renault remains highly exposed to Europe, which represented 57% of its 2016 global volumes. However, the Company’s geographic sales diversification is expected to improve in line with forecasted growth in international territories, notably Russia and China. Renault (by way of AvtoVAZ and its Lada brand) is the market leader in Russia, which is finally showing meaningful signs of a recovery following a protracted downturn. Moreover, in China, Renault seems well positioned to participate in the country’s mandated push toward electric vehicles (EVs), with the Alliance being the global mass market leader in EVs. DBRS notes further that this strong position in EVs should also help the Company withstand ongoing challenges associated with the diesel vehicle emissions issue in its core European market.

DBRS sees limited upside potential to the ratings over the near term, as the aforementioned projected increases in product development and emissions compliance costs appear likely to preclude a meaningful uptick in profit margins. Conversely, a significant downturn in the Company’s core European market could result in negative rating implications.

Notes:
All amounts are in euros unless otherwise specified.

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 principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

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

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the internal accounts and other relevant internal documents of the rated entity or its related entities.

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.