Primary Credit Analyst: Eric Tanguy, Paris (33) ;

Transcription

1 Summary: Valeo S.A. Primary Credit Analyst: Eric Tanguy, Paris (33) ; Secondary Contact: Antoine Cornu, Paris (33) ; Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Business Risk Financial Risk Liquidity Covenants Related Criteria And Research APRIL 26,

2 Summary: Valeo S.A. Corporate Credit Rating BBB/Stable/A-2 Profile Assessments BUSINESS RISK SATISFACTORY Vulnerable Excellent FINANCIAL RISK INTERMEDIATE Highly leveraged Minimal Rationale Business Risk: Satisfactory Financial Risk: Intermediate Leading market positions in several product lines. Good sales diversity across products, customers, and geographic markets, with a growing presence in Asia. Favorable long-term growth prospects, supported notably by the drive for lower carbon emissions. Industry-average profitability. Exposure to the cyclicality of the car component market. Strong, well-positioned competitors. Strong liquidity. Moderate financial policy. Decreasing EBITDA cash conversion due to high capital expenditures (capex) in 2013 that could lead to slightly negative free cash flow generation. APRIL 26,

3 Summary: Valeo S.A. Outlook: Stable The stable outlook reflects our view that Valeo's solid market positions should afford it resilience to tough market conditions in Europe, with limited erosion of its operating margins. We expect Valeo to maintain credit ratios that we consider commensurate with the 'BBB' rating, such as adjusted funds from operations (FFO) to debt of more than 35% and debt to EBITDA lower than 2.5x. We estimate that even in a scenario of flat revenue growth in 2013, the current cost structure should allow the group to maintain an adjusted EBITDA margin of about 8%, which would translate into credit metrics still aligning with the rating. Downside scenario We could lower the rating if Valeo's operating performance weakened markedly, resulting in adjusted FFO to debt of less than 30%. This could happen, for instance, if Valeo's EBITDA margin contracted by more than 250 basis points from the current level or if the group pursued unexpectedly large debt-funded acquisitions. Upside scenario Rating upside is limited over the next 12 months and would depend on Valeo's ability to deliver a solid performance and show strong profitability improvement following its efficiency programs. It would also hinge on improvement in Europe's macroeconomic environment, to which the group has high exposure. Furthermore, Valeo would need to maintain a sufficiently supportive financial policy focused on gradual deleveraging. Standard & Poor's Base-Case Scenario Assumptions Flat revenue growth in Flat to slightly decreasing adjusted EBITDA margin. Limited negative free operating cash flow over the rating horizon. Key Metrics 2012A 2013E 2014E Reported Operating Margin (%) 6.2 > S&P adjusted debt/ebitda (x) S&P adjusted FFO/debt (%) *Fully Standard & Poor's-adjusted. A--Actual. E--Estimated. Business Risk: Satisfactory In our base-case scenario for 2013, we anticipate that Valeo will withstand the depressed economic environment in Europe and post a marginally positive increase in revenues. The group will likely benefit from its robust relationships with German original equipment manufacturers (OEMs) and from its presence in more favorable markets, notably in Asia, where management aims to generate more than 30% of total sales by 2015 (27% in 2012). We note, however, that a less favorable customer mix in Japan as conditions for car production returned to normal affected the group's APRIL 26,

4 Summary: Valeo S.A. performance in We anticipate a small contraction in operating margins to about 6% in 2013, as some fixed costs, such as research and development (R&D), will likely increase. Margin deterioration will partly be mitigated, in our view, by Valeo's ongoing cost-cutting program. Beyond 2013, we expect Valeo's operating margin to improve gradually on improving market conditions and additional efficiency gains. We consider that Valeo benefits from favorable medium-to-long-term growth fundamentals, reflected in a 6% increase in its reported order intake at year-end Valeo is among the auto-suppliers that have a large exposure to the fast-growing Chinese market and holds strong positions in the promising field of CO2 reduction technology. We view Valeo's adjusted EBITDA margin of 8.3% in 2012 as no better than industry average. This is partly due to the group's still-large share of earnings from lower-value-added components and to its limited ability to benefit from economies of scale compared to larger peers. Financial Risk: Intermediate Our financial risk assessment is underpinned by Valeo's relatively moderate financial policy and by its strong liquidity, as defined in our criteria. Valeo's management has indicated it intends to maintain an investment grade rating, which in our adjusted metrics would translate into about 3x adjusted debt to EBITDA. At Dec. 31, 2012, Valeo's credit ratios were commensurate with the current rating, with adjusted debt to EBITDA at 2.0x and adjusted FFO to debt at 35.9%. In our base-case scenario for 2013, we expect Valeo to maintain credit ratios that we consider commensurate with the 'BBB' rating, such as adjusted FFO to debt of about 35% and debt to EBITDA lower than 2.5x. We think free operating cash flow (FOCF) will be close to neutral this year, even though the group has accelerated its capital expenditure (capex). Liquidity: Strong The short-term rating is 'A-2'. We view Valeo's liquidity as "strong" under our criteria, based on a ratio of sources to uses of liquidity above 1.5x, at Dec. 31, 2012, for the next 12 months. APRIL 26,

5 Summary: Valeo S.A. Principal Liquidity Sources About 880 million in available cash, excluding 450 million cash held on the group's balance sheet that we view as tied to ongoing operations; About 1.0 billion of available committed credit lines maturing beyond 12 months; and Our forecast of adjusted FFO of about 650 million, net of capitalized R&D, over the next 12 months. Principal Liquidity Uses Short-term debt of about 520 million; Our estimate of 950 million in capex; and Dividend payments of about 110 million. Covenants Within our "strong" liquidity assessment, headroom in terms of financial flexibility is reducing however as a result of our expectation of small negative FOCF generation in 2013 and the dividend payout ratio increasing to 30%, from 25% in Related Criteria And Research Business Risk/Financial Risk Matrix Expanded, Sept. 18, Corporate Criteria: Analytical Methodology, April 15, Corporate Criteria: Ratios And Adjustments, April 15, 2008 Captive Finance Operations, April 17, 2007 Business And Financial Risk Matrix Business Risk Financial Risk Minimal Modest Intermediate Significant Aggressive Excellent AAA/AA+ AA A A- BBB -- Highly Leveraged Strong AA A A- BBB BB BB- Satisfactory A- BBB+ BBB BB+ BB- B+ Fair -- BBB- BB+ BB BB- B Weak BB BB- B+ B- Vulnerable B+ B B- or below Note: These rating outcomes are shown for guidance purposes only. The ratings indicated in each cell of the matrix are the midpoints of the likely rating possibilities. There can be small positives and negatives that would lead to an outcome of one notch higher or lower than the typical matrix outcome. Moreover, there will be exceptions that go beyond a one-notch divergence. For example, the matrix does not address the lowest rungs of the credit spectrum (i.e., the 'CCC' category and lower). Other rating outcomes that are more than one notch off the matrix may occur for companies that have liquidity that we judge as "less than adequate" or "weak" under our criteria, or companies with "satisfactory" or better business risk profiles that have extreme debt burdens due to leveraged buyouts or other reasons. For government-related entities (GREs), the indicated rating would apply to the standalone credit profile, before giving any credit for potential government support. Additional Contact: Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com APRIL 26,

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