Morningstar DBRS Changes Trend on Stellantis N.V. to Negative From Stable, Confirms Issuer Rating and Senior Unsecured Debt at BBB (high)

DBRS Limited (Morningstar DBRS) changed the trends on Stellantis N.V.'s (Stellantis or the Company) Issuer Rating and Senior Unsecured Debt credit rating to Negative from Stable and confirmed the credit ratings at BBB (high). Concurrently, Morningstar DBRS changed the trend on Stellantis subsidiary Stellantis Finance US Inc.'s (Stellantis Finance US) Senior Unsecured Debt credit rating to Negative from Stable and confirmed the credit rating at BBB (high); the credit rating equivalency is based on the guarantee provided by Stellantis in support of Stellantis Finance US' Senior Unsecured Debt.

KEY CREDIT RATING CONSIDERATIONS
The trend changes reflect Stellantis' underperformance in the key North American market, where declining sales and inventory challenges have caused the Company to significantly revise downward its 2024 financial guidance, which not only outlined a marked contraction in forecast operating margins but also indicated the expectation of sizable negative free cash flow generation (i.e., ranging from EUR 5 billion to EUR 10 billion). Additionally, we note a softer industry environment going into 2025 with expected low growth for global auto sales volumes. This notwithstanding, the confirmation of the credit ratings incorporates Stellantis' sound business risk assessment (BRA) as a major automotive original equipment manufacturer (ranking fourth in global sales volumes, per 2023 data) with a strong brand portfolio and quite reasonable geographic diversification, notwithstanding the Company's modest presence in the major Chinese market. Moreover, Stellantis' financial risk assessment (FRA) remains robust, with the Company's industrial operations having a sizable (albeit meaningfully reduced) net cash position (i.e., industrial cash balances exceeding indebtedness) and substantial available liquidity.

CREDIT RATING DRIVERS
Consistent with the Negative trends on the credit ratings, continued weak earnings and sustained negative free cash flow generation, thereby resulting in a material deterioration in credit metrics, could result in a credit rating downgrade. Conversely, an ensuing improvement in earnings performance (which, however, is unlikely to revert to recent years' inordinately high levels) amid a return to positive free cash flow generation would likely result in Morningstar DBRS changing the trends on the credit ratings to Stable.

EARNINGS OUTLOOK
Morningstar DBRS expects the Company's 2025 industrial earnings to improve compared with weak 2024 operating results. Morningstar DBRS anticipates that Stellantis' 2025 sales volumes will increase moderately year over year (YOY), consistent with essentially flat to slightly higher YOY regional industry volumes forecast in the Company's key North American and European markets. Moreover, Morningstar DBRS expects Stellantis' regional market shares and pricing power to benefit from its forthcoming product offensive (significantly concentrated in the Jeep and Ram brands) and, in North America, a normalization of inventories (vis-à-vis elevated 2024 levels) that should facilitate a significant decrease in sales incentives. Despite the anticipated YOY improvement, Morningstar DBRS does not expect Stellantis' 2025 earnings to revert to the very strong levels of 2023-24 that benefitted from inordinately firm product mix and pricing. Moreover, the Company, as with its peers, continues to face high costs for new product/technology development in line with tightening emissions regulations across several jurisdictions globally.

FINANCIAL OUTLOOK
Going forward, following negative free cash flow generation in 2024 given softer earnings and a substantial use of cash by working capital, Morningstar DBRS estimates Stellantis' operating cash flow to remain solid. Moreover, notwithstanding increasing capital expenditure (capex) requirements and continued sizable dividend payments, Morningstar DBRS also expects Stellantis' gross free cash flow (i.e., before working capital items) to persist at materially positive levels, with the Company's financial profile benefitting further from its strong liquidity position.

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 in the premium and luxury automotive segments, these typically being more resilient to economic downturns than mainstream vehicles while also generating higher margins. Accordingly, Stellantis' free cash flow generating capacity remains considerable, notwithstanding its lacklustre 2024 operating performance. 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. Regarding electric vehicles (EVs), Stellantis appears reasonably well positioned, with the Company being a solid player in the EV space in its native European market. Stellantis' wide geographic scope and portfolio of automotive brands enable it to be tactical in offering new EV models in specific regional markets and at varying price points across the auto spectrum. The Company has also partnered with Chinese new energy vehicle manufacturer Zhejiang Leapmotor Technology Co., Ltd. (Leapmotor), with Leapmotor products to be targeted in Europe against value brands while also competing directly against Chinese EV brands that cumulatively represent close to 20% of EV sales in Europe.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
Morningstar DBRS considered that the factor related to carbon and greenhouse gas emissions represents a relevant factor as Stellantis 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 does 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 2030 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 to customers, possibly undermining Stellantis' future performance as a result. (For further details, please refer to the following commentary: "The Future is Electric: Climate Change and the Global Automotive Sector" at https://dbrs.morningstar.com/research/413419.)

There were no Social or Governance factors 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 the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

BRA AND 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 methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 10, 2024), https://dbrs.morningstar.com/research/441029

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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/431153.

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@morningstar.com.

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.

These credit ratings are 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, these are unsolicited credit ratings. These credit ratings were 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
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Dates:
Stellantis N.V.: November 8, 2005
Stellantis Finance US Inc.: September 10, 2021

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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