DBRS Confirms Renault S.A. at BBB, Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Renault S.A. (Renault or the Company) at BBB. The trends are Stable. The confirmation reflects the Company’s sound business risk assessment (BRA) as an original equipment manufacturer (OEM) with an established auto market position in Europe and whose competitive position is substantially strengthened by the alliance with Nissan Motor Co., Ltd. (Nissan; rated “A” with Stable trends by DBRS) and Mitsubishi Motors Corporation (Mitsubishi) (collectively, the Alliance). Moreover, Renault’s credit metrics have progressively improved in recent years, in line with consistent earnings/cash flow generation along with material reductions in indebtedness, with the Company’s financial risk assessment (FRA) being solid in the context of the assigned ratings. DBRS notes, however, that while the Alliance benefits Renault in terms of synergies and in various strategic areas, Renault’s and Nissan’s respective ratings are not closely linked.

The Company’s financial performance has continued to trend positively, in line with ongoing sales gains (that significantly reflect favourable industry conditions in its core European market) and cost reductions, although Renault’s earnings momentum has moderated this year, in line with higher raw material costs (which have affected the entire automotive industry) and negative foreign exchange developments. Nevertheless, the Company’s industrial margins are well commensurate with mass market automotive OEMs, bolstered by the consistently strong performance of its financial services segment.

While Europe remains core, Renault’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 (consolidated as of year-end 2016) and its Lada brand, is the market leader in Russia, which is finally showing meaningful signs of a recovery following a protracted downturn. Additionally, Renault seems well positioned to participate in China’s mandated push toward electric vehicles (EVs) with the Alliance being the global mass market leader in EVs.

Going forward, DBRS notes that automotive market conditions in aggregate remain moderately favourable. 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 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 adversely affect the ratings. Additionally, DBRS notes that Renault’s BRA benefits from the Alliance. Moreover, the Alliance results in significant synergies and cost efficiencies, the absence of which would likely undermine the Company’s earnings and, ultimately, its FRA. As such, any meaningful unwinding of the Alliance could result in negative rating implications. 

Notes:
The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018) which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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