Morningstar DBRS Confirms Stellantis at BBB (high); Trend Remains Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Stellantis N.V. (Stellantis or the Company) at BBB (high). Concurrently, Morningstar DBRS also confirmed the Senior Unsecured Debt rating of Stellantis subsidiary, Stellantis Finance US Inc. (Stellantis Finance US) at BBB (high). The trends on all credit ratings remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the credit ratings incorporates Stellantis’ sound business risk assessment (BRA) as a major automotive original equipment manufacturer (ranking third in global sales volumes, per 2022 data) with a strong brand portfolio and quite reasonable geographic diversification, notwithstanding the Company’s diminishing presence in the major Chinese market. Moreover, Stellantis’ financial risk assessment (FRA) is robust, with the Company’s industrial operations having a sizable net cash position (i.e., industrial cash balances exceeding indebtedness) and substantial available liquidity.

CREDIT RATING DRIVERS
Consistent with the Stable trends on the credit ratings, Morningstar DBRS expects the Company’s ratings to remain constant over the near to medium term. While significantly weaker earnings amid ongoing high investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, Morningstar DBRS deems such a scenario rather unlikely, noting that Stellantis’ FRA provides some cushion in the context of the currently assigned credit ratings. Conversely, these sizable cost and investment headwinds likely preclude a further improvement in the Company’s financial profile, thereby rendering positive credit rating actions somewhat unlikely in the short to medium term.

EARNINGS OUTLOOK
Over the near term, Morningstar DBRS expects the Company's earnings to moderate from recent strong levels. While volumes may benefit from the ongoing improvement in vehicle supply, Morningstar DBRS notes that this is likely to be partly offset by demand headwinds (including the ongoing depletion of pent-up demand) reflecting inflationary pressures, high interest rates, and geopolitical uncertainty. Moreover, Morningstar DBRS expects pricing to soften as vehicle supply normalizes, with product mix likely also being similarly affected. While Stellantis expects to derive ongoing synergies resulting from the (Peugeot SA and Fiat Chrysler Automobiles NV) merger, the Company also faces higher costs for new product/technology development in line with tightening emissions regulations across several jurisdictions globally. Therefore, on balance, while Morningstar DBRS anticipates earnings will likely soften as a function of the headwinds cited immediately above, it nonetheless expects Stellantis' profitability to remain materially positive, noting the Company's solid market position in higher-margin vehicle segments that notably include full-size pickup trucks in addition to premium and luxury vehicles. Morningstar DBRS also notes that the Company's profitability is further supported by its favourable industrial breakeven point, with Stellantis targeting to maintain such at less than 50% of 2021 consolidated shipments.

FINANCIAL OUTLOOK
Going forward, in line with the projected moderation in earnings, Morningstar DBRS estimates Stellantis' operating cash flow to soften from recent strong levels; despite this, operating cash flow is expected to remain solid. Moreover, notwithstanding increasing capital expenditure (capex) requirements and assumed higher dividend payments, Morningstar DBRS also expects Stellantis' gross free cash flow (i.e., before working capital items) to persist at materially positive levels.

CREDIT RATING RATIONALE
Stellantis’ credit ratings are supported by its solid market position and large scale. Moreover, the Company’s BRA is further bolstered by its established presence in truck/utility vehicles as well as the premium and luxury automotive segments, these typically being more resilient to economic downturns while also generating higher margins. Accordingly, Stellantis’ free cash generating capacity remains considerable. However, the credit ratings also reflect the substantial structural cost and investment headwinds facing the Company in line with the progressive electrification of the global vehicle fleet amid ongoing expansion into new mobility business initiatives.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Morningstar DBRS considered that the E factor, specifically costs relating to carbon dioxide (CO2) and greenhouse gas emissions, represents a relevant factor as Stellantis is subject to a wide range of environmental compliance requirements relating to (CO2), fuel efficiency, emissions control, and other factors. In the event that the Company did not comply with applicable regulations, significant penalties and reputational harm could result. In March, 2022, Stellantis presented its Dare Forward 2030 strategic plan that outlined its commitment to reaching net-zero emissions by 2038, with a 50% reduction targeted by 2030 (versus 2021 metrics). A key element of Dare Forward 30 also includes the Company's confirmation to commit more than EUR 30 billion in capex, research and development, and joint venture investments in electrification and software over the 2021–25 period. Costs associated with the deployment of electrification and CO2-abating technologies may be difficult to pass through customers, possibly undermining Stellantis’ future performance as a result.

There were no Social or Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Stellantis, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Stellantis, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Stellantis, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 11, 2023), https://dbrs.morningstar.com/research/421716
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://dbrs.morningstar.com/research/411694

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

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

This is an unsolicited credit rating.

This credit 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 credit ratings:

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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Tom Currie, Managing Director, Credit Ratings
Initial Rating Dates:
Stellantis NV – January 27, 2001
Stellantis Finance US Inc. – September 15, 2021

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at [email protected].

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