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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating on Renault S.A. (Renault or the Company) at BB (high). The rating action incorporates the Company’s ongoing earnings improvement, albeit from weak levels. The trend on the rating remains Negative, however, reflecting considerable headwinds in form of inflationary pressures, rising interest rates, and geopolitical uncertainty, which appear to be most pronounced in Renault’s core European market.

The Company’s 2021 earnings performance improved year over year (YOY), with the operating profit of Renault's automotive division reverting to positive levels (from losses incurred in 2020). Contributing factors included a firmer product mix, stronger pricing, and attained efficiency gains; these were partly offset by higher raw material costs and volume constraints reflecting the global semiconductor shortage and other supply base challenges. Through the first half of 2022 (H1 2022), the Company’s earnings performance continued to trend favourably with the automotive segment attaining an operating margin of 2.1% (the underlying causal factors remaining consistent with 2021).

Renault recently announced an update of its strategic plan (designated as Renaulution by the Company) that notably included plans to create five distinct businesses, including “Ampère” (focussing on electric vehicles (EVs)); “Alpine” (focussing on zero-emission sports cars); “Mobilize” (consisting of financial services and new mobility businesses); and “Power” (new vehicle development based on internal combustion engine (ICE) and hybrid technologies). Additionally, under the Company’s “Horse” project, Renault plans to form a 50-50 joint venture (JV) with Geely Holding Group and Geely Automobile Holdings Limited (collectively, Geely) to supply ICE and hybrid powertrains. Concerning Ampère, Renault is envisaging an initial public offering of a minority stake in this business no earlier than H2 2023, subject to market conditions. In addition to the above-cited planned reorganisation, the Company is in discussions with Nissan Motor Co., Ltd. (Nissan, rated BBB (low) with a Stable trend by DBRS Morningstar) regarding a potential investment in Ampère as well as the future composition of its alliance (substantially) with Nissan (that may eventually entail changes in the companies’ respective cross-ownership positions). DBRS Morningstar generally regards Renault’s strategic update somewhat positively, although considerable implementation risk is involved in addition to associated challenges in corporate governance.

Despite lacklustre earnings and operating cash flow in recent years, Renault’s liquidity remains sound, partly reflecting implemented cost reductions, curtailed capital expenditures, and the cancellation of ordinary dividends (that the Company plans to reinstate next year). As of June 30, 2022, the liquidity position of the Company’s automotive segment amounted to EUR 15.8 billion (consisting of EUR 12.4 billion in cash balances and EUR 3.4 billion in available committed credit lines). This is deemed sufficient by DBRS Morningstar in the context of moderately positive gross free cash flow (i.e., before working capital effects) projected over the near to medium term, with the automotive business also benefitting from ongoing dividends from the financial services segment.

Consistent with the Negative trend, material losses of Renault in forthcoming periods would likely result in a rating downgrade. Conversely, markedly stronger operating performance over the similar time horizon could have positive rating implications; DBRS Morningstar notes, however, such improvement stands to be hindered by market and cost headwinds facing the industry.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Renault is subject to a wide range of environmental compliance requirements relating to carbon dioxide (CO2), fuel efficiency, emissions control, and other factors. In the event that the Company would not comply with applicable regulations, significant penalties and reputational harm could result. Correspondingly, in 2021, Renault announced its climate strategy that outlined its aim to achieve carbon neutrality in Europe by 2040 and worldwide by 2050 by reducing its carbon emissions over the entire life cycle of the vehicle. Moreover, given its five common electric platforms covering most segments, the Renault brand aims to become 100% electric by 2030 for passenger cars in Europe. As a function of these objectives, Renault and the Alliance have publicly targeted EUR 23 billion in electrification investments over the 2022–26 time period.

Although the environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Renault.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 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:

The last rating action on this transaction took place on November 9, 2021, when DBRS Morningstar confirmed Renault S.A. at BB (high) with the trend remaining Negative.

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

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: https://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, Credit Ratings, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Senior Vice President, Credit Ratings, Diversified Industries
Initial Rating Date: August 31, 2006 (Benchmark: November 27, 2000)

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at [email protected].

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

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-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022)
https://www.dbrsmorningstar.com/research/404042