DBRS Morningstar Downgrades Renault SA to BB (high) with a Negative Trend; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) downgraded the Issuer Rating of Renault S.A. (Renault or the Company) to BB (high) from BBB. The trend is Negative. (Concurrently, DBRS Morningstar also made the decision to discontinue and withdraw Renault’s Senior Unsecured Debt rating.) Pursuant to the moderate scenario outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (initially dated April 22, 2020, and most recently updated on September 10, 2020, as indicated in the subsequent document titled “Global Macroeconomic Scenarios: September Update”), DBRS Morningstar projects the Company’s financial risk assessment (FRA) and associated credit metrics to decline to levels markedly weaker relative to the former ratings as a result of the global escalation of the Coronavirus Disease (COVID-19) pandemic. The Negative trend also reflects the ongoing challenges facing the automotive industry given the uncertainty about the continued progression of the coronavirus pandemic across various jurisdictions and its potential further impact on sales or production levels. With this rating action, DBRS Morningstar removed Renault’s Issuer Rating from Under Review with Negative Implications, where it was placed on March 27, 2020.

DBRS Morningstar notes that prior to the pandemic, the Company’s FRA was at solid levels (providing some cushion in the context of the former rating), significantly reflecting Renault’s conservative financial policy. However, earnings were progressively softening in line with moderating sales volumes, weaker product mix and pricing amid cost headwinds in the form of alternative powertrain development (i.e., the progressive electrification of its product portfolio), and emissions regulatory costs. Moreover, Renault’s alliance (substantially) with Nissan Motor Co., Ltd. (Nissan; rated BBB (low) with a Negative trend by DBRS Morningstar) had been undergoing increasing scrutiny as a result of meaningful challenges confronting Nissan, including, among others, sharply deteriorating operating performance and prior corporate governance issues.

Consistent with other original equipment manufacturers (OEMs), Renault’s financial results this year have been adversely affected by the coronavirus pandemic; DBRS Morningstar further notes that the Company’s earnings decline exceeded that of most of its peers. More specifically, in H1 2020, Renault reported a 36% decrease in automotive revenues to EUR 16.9 billion, with the segment’s operating income being materially negative in the amount of EUR 2.5 billion. Currently, DBRS Morningstar anticipates Renault’s annual automotive revenues in 2020 to decline by approximately 25% compared with 2019 levels, with the operating margin estimated to remain at materially negative levels. DBRS Morningstar also expects free cash flow generation to be negative for the year given the decline in earnings, with such likely being exacerbated by material working capital cash usage. As a result, DBRS Morningstar projects the Company’s credit metrics to weaken considerably in 2020, followed by only a moderate recovery in the following year.

Despite the above, DBRS Morningstar notes that Renault has taken a number of meaningful and proactive measures to bolster its cash and liquidity position in response to the coronavirus pandemic. These include implemented cost reduction measures, a moderation in capital expenditures, and the cancellation of its previously proposed 2019 dividend (such payments recently averaging approximately EUR 1.1 billion annually). Additionally, to supplement confirmed backup credit lines that previously totalled EUR 3.5 billion, the Company in June 2020 obtained an additional credit line of EUR 5 billion (of which 90% is guaranteed by the French State); Renault indicated that it had drawn EUR 3 billion from this facility as of September 30, 2020. As a result of the above, notwithstanding significant cash burn resulting from the coronavirus, DBRS Morningstar deems the Company’s liquidity position over the near term to be sound.

While the effects of the coronavirus pandemic on the sales and production levels of OEMs were initially substantially negative, DBRS Morningstar notes that the ensuing sales recovery across major jurisdictions so far has moderately exceeded its expectations. The recovery thus far has been strongest in China and the United States, to which Renault’s direct collective exposure is very modest. While the Company does have meaningful indirect exposure to these markets by way of its ownership stake in Nissan, DBRS Morningstar does not expect Renault to receive any material dividends from Nissan over the near term (given the latter’s weak projected earnings performance over such time period). However, DBRS Morningstar notes that in September 2020, European monthly automotive sales also reverted to growth (compared with similar prior-year periods) for the first time since the onset of the pandemic. However, this sales recovery could yet be undermined by the trajectory of the pandemic, which (with the apparent exception of China) shows no signs of abating across several major markets.

Consistent with the Negative trend on the rating and recognizing the ongoing uncertainty regarding the ultimate severity and duration of the coronavirus pandemic, DBRS Morningstar notes that an additional progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) or sustained further erosion in Renault’s operating margins could result in additional downward rating pressures. Conversely, should the worst effects of the coronavirus pandemic be significantly contained in 2020 and followed by a meaningful recovery notwithstanding lingering remnants of the pandemic across various jurisdictions, the trend on the rating could be changed to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

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

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

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS Morningstar used “Rating Companies in the Automotive Manufacturing and Supplier Industries” (October 22, 2020) as the primary rating methodology in determining the rating of the parent company, Renault S.A. Subsequently, “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” (November 2, 2020) was applied to assess the corporate structure of the Renault group of companies.

The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of Renault S.A. Under Review with Negative Implications.

Solely with respect to ESMA regulations in the European Union, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Date: August 31, 2006 (Benchmark: November 27, 2000)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 22, 2020)
https://www.dbrsmorningstar.com/research/368670/rating-companies-in-the-automotive-manufacturing-and-supplier-industries

-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020)
https://www.dbrsmorningstar.com/research/369167/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships