DBRS Morningstar Confirms Rating on Renault S.A. at BB (high); Trend Remains Negative

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Renault S.A. (Renault or the Company) at BB (high). The confirmation reflects the Company’s moderately improving operating performance (albeit from weak levels) amid initial progress on its current strategic plan (designated as Renaulution by the Company) which, in combination with Renault’s conservative financial policy, has prevented a further deterioration in its financial risk assessment to a level that would warrant a downgrade. The trend on the rating remains Negative, however, as Renault’s operating performance (notably that of the automotive operations) remains lacklustre, with the ongoing global semiconductor shortage and rising raw material costs representing meaningful headwinds over the near term.

While the Company’s earnings in 2020 were markedly weaker year over year, DBRS Morningstar notes that this primarily reflects sizable losses incurred in the first half of the year in which automotive (among other sectors) industry conditions were extremely unfavourable substantially because of the global progression of the Coronavirus Disease (COVID-19), adversely affecting both demand and production levels. However, benefitting from an industry recovery over the remainder of the year that exceeded DBRS Morningstar’s expectations, Renault reverted to modest profitability in H2 2020. Moreover, Renault’s automotive operations are estimated to remain nominally profitable in 2021 amid volume gains (notwithstanding production losses of close to an estimated 500,000 units as a result of the semiconductor shortage), firmer product mix and higher pricing. The Company is also on track to attain fixed cost reductions of approximately EUR 2 billion targeted in its Renaulution plan one year ahead of schedule. DBRS Morningstar notes, however, that Renault’s profitability remains low relative to its automotive peers. Moreover, increasing raw material and product development costs appear likely to undermine margin gains going forward as Renault has limited pricing power to help offset such increases.

Despite notably weaker earnings and operating cash flow in recent years, Renault’s liquidity remains sound, partly reflecting implemented cost reductions, curtailed capital expenditures, and the current cancellation of ordinary dividends. The Company also drew down approximately EUR 4 billion last year from its bank credit facility (90%) guaranteed by the French State, (with EUR 1 billion slated for repayment this year). As of June 30, 2021, the liquidity position of the Company’s automotive segment amounted to EUR 16.7 billion (consisting of EUR 13.3 billion in cash balances and EUR 3.4 billion in available committed credit lines). This is deemed sufficient by DBRS Morningstar to readily absorb near-term debt maturities in addition to ongoing negative free cash flow generation (that is nonetheless estimated by DBRS Morningstar to moderate considerably going forward).

Consistent with the Negative trend on the rating, increasing losses at Renault in the forthcoming periods would likely result in a downgrade. Conversely, markedly stronger operating performance over a similar time horizon could have positive rating implications; DBRS Morningstar notes, however, that such improvement stands to be hindered by significant cost headwinds (notably in the form of ongoing investments associated with the increasing electrification of the automotive fleet) facing the industry. Finally, despite recent associated challenges, Renault’s ratings continue to benefit from its alliance (substantially) with Nissan Motor Co., Ltd. (rated BBB (low) with a Negative trend by DBRS Morningstar); accordingly, any meaningful unwinding thereof could also result in negative rating implications.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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].

The 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 is an unsolicited credit rating.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. 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, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021) as the primary rating methodology in determining the rating of the parent company, Renault S.A.

The last rating action took place on November 10, 2020, when DBRS Morningstar downgraded Renault S.A. to BB (high) with a Negative Trend; Removing the Ratings from Under Review with Negative Implications.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, 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 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

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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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021)
https://www.dbrsmorningstar.com/research/385892/rating-companies-in-the-automotive-manufacturing-and-supplier-industries