Primary Credit Analyst: Eric Tanguy, Paris (33) ; Initial Analytical Outcome ("Anchor") And Rating Result

Transcription

1 Primary Credit Analyst: Eric Tanguy, Paris (33) ; Secondary Contact: Vincent Gusdorf, CFA, Paris (33) ; Recovery Analyst: Desiree I Menjivar, London (44) ; desiree.menjivar@standardandpoors.com Table Of Contents Initial Analytical Outcome ("Anchor") And Rating Result Rationale Outlook Standard & Poor's Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Ratings Score Snapshot Recovery Analysis Reconciliation Related Criteria And Research APRIL 30, Standard & Poor's. All rights reserved. No reprint or dissemination without Standard & Poor s permission. See Terms of Use/Disclaimer on the last page

2 Corporate Credit Rating BB+/Stable/B Profile Assessments BUSINESS RISK FAIR Vulnerable Excellent FINANCIAL RISK INTERMEDIATE Highly leveraged Minimal Initial Analytical Outcome ("Anchor") And Rating Result Our 'BB+' rating on France-incorporated automotive manufacturer Renault S.A. is derived from: Our anchor of 'bb+', based on our "fair" business risk and "intermediate" financial risk profile assessments for the company. Under our criteria, the combination of a "fair" business risk profile and an "intermediate" financial risk profile points to a single-choice anchor of 'bb+'. Modifiers have no impact on the final rating. Rationale Business Risk: Fair Weak profitability of the group's core automotive operations and one-offs affecting group performance in Small size by global standards. Good market positioning in the small car and entry segments. Potential to improve scale and geographic spread through cooperation with Nissan. Financial Risk: Intermediate Robust credit ratios for the rating. Track-record of positive free operating cash flow generation in recent years, expected again in Positive contribution to cash flow from its captive finance arm, RCI Banque and, through dividends, from its equity associate Nissan. APRIL 30,

3 Outlook: Stable The stable outlook on Renault mainly reflects Standard & Poor's Ratings Services' view that Renault's European automotive operations will continue to make a weak contribution to group earnings over the next 12 months. We believe, however, that the group should be in a position to easily maintain credit ratios that we consider as commensurate with our 'BB+' rating. As a minimum, we see adjusted funds from operations (FFO) to debt in the 20% to 30% range and debt to EBITDA of less than 4x, even in the most difficult years, as consistent with our current rating on Renault. Volume carmakers are subject to cyclicality, so our target credit ratios incorporate buffers to enable us to rate through the cycle. Downside scenario We could lower the ratings if Renault's automotive operating margin weakened markedly from the current break-even level and turned heavily loss-making, resulting in FFO to debt below 20%. This could result from a sharp contraction in operating margin, caused by a prolonged period of severe double-digit declines in vehicles sold or the inability to contain--if not reduce--costs. Upside scenario We could raise the ratings if the operating margin of Renault's core automotive operations structurally improves toward the mid-single digits, including through periods of soft demand, and consolidated operating margin continues to trend upward toward 5%. Further reduction of Renault's dependence on the European market would also be beneficial, in our view. Standard & Poor's Base-Case Scenario Our base-case scenario for 2014 includes expectations of mid-single-digit revenue growth for the group and consolidated EBITDA margin slightly improving toward 10% from 8.9% in 2013 on a reported basis. APRIL 30,

4 Assumptions GDP growth in 2014 of 0.9% in the eurozone (European Economic and monetary Union). Light vehicle sales in Western Europe to increase by about 3% in the first year in positive range since and positive growth to continue in Car markets in Brazil and Argentina and Eastern Europe, including Russia and Turkey, expected to be flat or even report small declines on a full-year basis; effect on Renault's unit sales may however be partly offset by the group's positioning in the entry segment. Total group revenues increasing by a few percentage points after the 0.8% decline reported for Auto operating margin improving toward 2% over from 1.3% reported in The segment is expected to remain positive in operating income terms with much less one off expenses than the 1.3 billion booked in Consolidated operating margin improving 50 basis points-100 basis points (bps) over from the 2013 level (3.0%), with reported EBITDA margin improving toward 10%. Positive consolidated free operating cash flow (FOCF) in 2014, but probably lower than in Key Metrics Reported EBITDA margin (%) Reported operating margin (%) S&P-adjusted FFO/debt (%) S&P-adjusted debt/ebitda (x) a--actual. e--estimate. 2013a 2014e 2015e More than 45 More than Less than 2.0 Less than 2.0 Company Description Renault is a France-incorporated midsize car manufacturer with a growing presence outside Western Europe. In 2013, Renault ranked third in the passenger car segment in Europe in terms of units sold, with a 8.9% market share (figures for the EU-27 plus European Free Trade Association countries, from the European Automobile Manufacturers Association). Renault's market share was behind Germany's Volkswagen AG and French competitor Peugeot S.A. but ranked ahead of U.S.-based and General Motors Co.and Ford Motor Co., and Italy-based Fiat SpA. Renault also holds a significant 16.4% market share in the European market for LCVs (light commercial vehicles of less than 3.5 tons). In 2013, Renault sold a total of 2.63 million vehicles. The group has three brands: Renault (81% of consolidated auto volume sales), Dacia, and Renault Samsung Motors (primarily in South Korea). A majority of group revenues are still generated in Europe, but Europe's contribution has been steadily declining over the past three years (see table 1). Renault is not present in North America, with the APRIL 30,

5 exception of Mexico, nor in Japan. Table 1 Renault -- Geographic Breakdown Of Sales Fiscal year ended --Dec. 31, Dec. 31, Dec. 31, Revenues (mil. ) % Vehicles Revenues sold* % (mil. ) % Vehicles Revenues sold* % (mil. ) % Vehicles sold* % Europe 23, , , , , , of which France 10, , NA Euromed-Africa 4, , , (Romania, Turkey, Algeria, Morocco) Eurasia (Russia, Ukraine) Asia-Pacific (South Korea) Americas (South America) 2, , , , , , , , , Consolidated40, , , , , , total *Passenger cars and light commercial vehicles in '000s units. N.A.--Not available. The Clio and Logan-Sandero, Renault's best-selling model families, accounted for 15.8% and 23.3% of total sales in Financial services, under the aegis of RCI Banque, the captive finance arm of the group, have contributed positively to the group's reported operating income, including throughout the economic downturn. The French state and Nissan are the group's main shareholders and are likely to remain so in the medium term. They each hold about 15% of Renault's capital. Renault owns a very significant stake (43.4%) in Nissan Motor Co. Ltd. and in Russian car producer AvtoVAZ, operating the Lada brand. Renault increased its stake in AvtoVAZ to 35.9% in June 2014, pursuant to a US$366 million investment plan. Cross-shareholdings between Nissan and Renault represent more than pure financial investments, being part of the global alliance existing between the two companies since However, Nissan has no voting rights in Renault. The strategies of both companies are closely coordinated, and, since 2005, they have a common CEO, Carlos Ghosn. APRIL 30,

6 Business Risk: Fair The main factors supporting Renault's "fair" business risk profile, in our view, are a good market position in the entry segment of the car market, contributing positively to group earnings, and the company's strategic alliance with Nissan. Joint purchasing, common research and development, and shared network management with Nissan have already generated meaningful synergies for Renault, and in the future we would expect the company to benefit further from platform-sharing with Nissan including in emerging countries with long-term growth potential. Development of sales in growing markets outside Western Europe, such as Latin America, Eastern Europe, Russia, Middle East and North Africa also underpin our assessment of Renault's "fair" business risk profile. In a given year, Renault's performance in one of those regions may however be volatile as it will depend on the specific situation of the domestic car market and relative cost competitiveness of Renault's product offer. We note that Renault's exposure to the Russian car market increased in 2013, particularly in terms of earnings performance. These supporting factors are offset by the low profitability of Renault's core automotive operations. In 2013, underlying operating earnings for automotive amounted to 521 million, representing a low 1.3% margin on sales. In operating income terms, these earnings were more than offset by one-off items, mainly related to restructuring charges ( 0.4 billion) and provisons for Renault's operations in Iran ( 0.5 billion). With Western Europe contributing about half of unit sales in 2013, Renault still depends to a meaningful degree on the mature and highly competitive European car market. Finally, Renault is exposed to the fundamental characteristics of the mass-market auto industry: demand cyclicality, excess production capacity and intense competition in Western Europe, high capital intensity and a significant fixed-cost base that results in high operating leverage. APRIL 30,

7 S&P Base-Case Operating Scenario GDP growth in 2014 of 0.9% in the eurozone (European Economic and monetary Union), 3.0% in the U.S., and 5.5% in Asia Pacific, with China still reporting close to 7.5% growth. A 4% growth in global car sales for 2014 driven primarily by positive momentum in Asia-Pacific and North America. We however expect light vehicle sales in Western Europe to increase by about 3% in the first year of positive growth since 2007; after six consecutive years of successive declines in the Western European car market, 2014 is the first year for which we expect positive growth. We assume positive growth will continue in Car markets in Brazil and Argentina and Eastern Europe, including Russia and Turkey, expected to be flat or even report small declines on a full-year basis; effect on Renault's unit sales may however be partly offset by the group's positioning in the entry segment. Total group revenues increasing by low mid-single digit after the 0.8% decline reported for Foreign exchange movements are likely to result in a slight negative impact on consolidated revenues in 2014 because of translation effect. Continuing cost-savings and growing volume sales outside Europe resulting in auto operating margin improving toward 2% over , from 1.3% reported in 2013; segment is expected to remain positive in operating income terms with much less one off expenses than the 1.3 billion booked in Steady flow of operating earnings (above 700 million) expected to come from Renault's captive finance arm. Consolidated operating margin improving 50 bps-100 bps over , from the 2013 level (3.0%), with reported EBITDA margin improving toward 10%. Peer comparison Table 2 Renault S.A. -- Peer Comparison Industry Sector: Automotive - OEM'S Renault S.A. Peugeot S.A. Fiat SpA Volkswagen AG Rating as of April 30, 2014 BB+/Stable/B B+/Stable/B BB-/Stable/B A-/Positive/A-2 (Mil. ) --Average of past three fiscal years-- Revenues 39, , , ,306.0 EBITDA 3, , , ,348.4 Funds from operations (FFO) Net income from continuing operations 2, , , ,483.3 (2,510.0) ,395.7 Cash flow from operations 2, , ,825.5 Capital expenditures 1, , , ,690.0 Free operating cash flow 1,045.4 (1,949.3) (396.7) 7,135.5 Discretionary cash flow (2,041.0) (476.7) 5,539.5 Cash and short-term investments 3, , , ,213.9 Debt 4, , , ,335.7 Equity 21, , , , APRIL 30,

8 Table 2 Renault S.A. -- Peer Comparison (cont.) Adjusted ratios EBITDA margin (%) Return on capital (%) 8.6 (7.2) EBITDA interest coverage (x) FFO cash interest coverage (X) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) (23.1) (1.5) (24.1) (1.8) 18.9 Financial Risk: Intermediate At end-december 2013, Renault had about 4.0 billion in net debt, including Standard & Poor's adjustments for operating leases, pension deficits, and deconsolidation of the substantial finance liabilities borne by the company's captive finance subsidiary. On Dec. 31, 2013, the cash reported by Renault for its automotive operations amounted to 10.7 billion, up from 10.1 billion a year before. The year-on-year increase reflected mainly the positive discretionary cash flow generated by Renault's automotive operations last year. We deduct 8.0 billion in cash from gross financial debt, as we consider that cash held by the captive finance is segregated and apply a 25% haircut to cash held by the automotive division. Renault's adjusted credit ratios were comfortable for its ratings at year-end 2013: fully-adjusted funds from operations (FFO) to debt stood at 61%, debt to EBITDA was 1.3x, and FOCF to debt 26.1%. We believe that improving market conditions in Europe in should reinforce Renault's credit ratios assuming the company's disciplined approach in respect of working capital and acquisitions remains unchanged. APRIL 30,

9 S&P Base-Case Cash Flow And Capital Structure Scenario We anticipate that Renault's credit metrics in 2014 and 2015 should easily remain at the higher end of our intermediate category for financial risk, with adjusted debt to EBITDA below 2x and adjusted FFO to debt above 45%. Our key assumptions are: Capital expenditures growing to 2.8 billion in 2014 and 3.0 billion in 2015; Moderate dividend outflow of less than 700 million representing to a large extent a pass-through of the amounts received by Renault from its equity investments in Nissan and Daimler; No major acquisition spending and no material disposal proceeds; Limited adverse working capital swings; and Positive consolidated FOCF in 2014 and again in Financial summary Table 3 Renault S.A. -- Financial Summary Industry Sector: Automotive - OEM'S --Fiscal year ended Dec (Mil. ) Revenues 38,775 39,156 40,679 37,172 31,951 EBITDA 3, , , , ,504.0 Funds from operations (FFO) Net income from continuing operations Cash flow from operations 2, , , , ,772 2,092 1,420 (3,125) 3, , , , ,558.3 Capital expenditures 2,009 2,081 1,617 1,197 1,703 Free operating cash flow (FOCF) Discretionary cash flow (DCF) Cash and short-term investments 1, , , , , , , , , , , ,967.0 Debt 4, , , , ,302.0 Equity 20, , , , ,675.7 Adjusted ratios EBITDA margin (%) Return on capital (%) (7.7) EBITDA interest coverage (x) FFO cash interest coverage (x) N.M. 3.1 Debt/EBITDA (x) FFO/debt (%) APRIL 30,

10 Table 3 Renault S.A. -- Financial Summary (cont.) Cash flow from operations/debt (%) FOCF/debt (%) DCF/debt (%) OEM--Original equipment manufacturer. Liquidity: Adequate The short-term rating on Renault is 'B'. We view Renault's liquidity as "adequate" under our criteria on the basis of our projection that the company's ratio of potential sources of liquidity to uses will comfortably exceed 1.2x in each of the coming two years, as of Dec. 31, Principal Liquidity Sources 10.7 billion of cash and cash equivalents held in its automotive division, to which we apply a 25% haircut as necessary for ongoing operations. Access to 3.5 billion in undrawn bilateral committed credit lines, of which 3.1 billion had a maturity in excess of 12 months. According to management, the existing bank lines contain no financial covenants, and no material adverse change, negative pledge, or cross-default clauses. Our expectation of positive FOCF in 2014, which should provide some support to liquidity. Principal Liquidity Uses 3.7 billion in automotive debt maturing in less than one year Capital expenditures increasing to 2.8 billion in 2014; Moderate dividend outflow of less than 700 million; No major acquisition spending and no material disposal proceeds; and Limited adverse working capital swings. Ratings Score Snapshot Corporate Credit Rating: BB+/Stable/B Business risk: Fair Country risk: Intermediate Industry risk: Moderate Competitive position: Fair Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bb+ APRIL 30,

11 Modifiers Diversification/portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Strong (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable ratings analysis: Neutral (no impact) Recovery Analysis Key analytical factors The issue rating on Renault's senior unsecured notes issued under the 7 billion Euro Medium-Term Note program is 'BB+', in line with the corporate credit rating on the company. The recovery rating on these notes is '3'. The recovery rating is supported by the company's substantial asset base but constrained by the unsecured nature of the notes, the possibility of capital structure changes on the path to default, and our opinion of the less creditor-friendly jurisdiction of France. In our hypothetical default scenario to calculate recoveries, we assume a payment default in 2019 as a result of significant deterioration in operating performance and negative free cash flow generation at Renault's auto business. Moreover, under our path-to-default scenario, we assume that operating losses and restructuring expenses would require significant cash funding and would eat at the company's available liquidity. In this scenario, under tight credit conditions, we project that Renault would be unable to raise additional debt funding. We value Renault as a going concern because it has, in our view, a good market position, a widespread distribution network, and well-known brands. As such, we believe creditors would obtain greater recovery through reorganization as opposed to liquidation. Simulated default assumptions Year of default: 2019 Jurisidiction: France Gross enterprise value at default: 10.3 billion Simplified waterfall Net enterprise value (after 9% administrative costs): 9.4 billion Priority claims: 2.4 billion Senior unsecured debt claims: 11.2 billion* --Recovery expectations: 50%-70% *All debt amounts include six months' prepetition interest Reconciliation APRIL 30,

12 Table 4 Reconciliation Of Renault S.A. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. ) Renault S.A. reported amounts Shareholders' Debt equity Revenues EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Dividends Capital paidexpenditures Reported 33, , , ,623.0 (34.0) , , ,749.0 Standard & Poor's adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) Operating leases (450.0) (443.0) Postretirement benefit (18.0) obligations/deferred compensation Surplus cash Capitalized development costs Share-based compensation expense Dividends received from equity investments Captive finance operations Nonoperating income (expense) Noncontrolling Interest/minority interest Debt - other EBITDA - other (8,028.0) (732.0) (732.0) (732.0) -- (732.0) (22,747.3) (2,274.7) (2,157.0) (726.0) (236.8) -- (712.0) (8.0) , (217.0) Total (29,743.0) (1,897.7) (2,157.0) (406.5) 1, (1,153.6) (508.6) 0.0 (740.0) adjustments APRIL 30,

13 Table 4 Reconciliation Of Renault S.A. Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. ) (cont.) Standard & Poor's adjusted amounts Debt Equity Revenues EBITDA EBIT Interest expense Funds from operations Cash flow from operations Dividends Capital paidexpenditures Adjusted 4, , , , , , , ,009.0 Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Key Credit Factors For The Auto Suppliers Industry, Nov. 19, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings Detail (As Of April 30, 2014) Renault S.A. Corporate Credit Rating Commercial Paper Local Currency Senior Unsecured Greater China Regional Scale Senior Unsecured Short-Term Debt Corporate Credit Ratings History 03-Nov Oct Jun-2009 Related Entities Cofiren Renault et Cie Issuer Credit Rating DIAC S.A. Issuer Credit Rating Certificate Of Deposit Senior Unsecured RCI Banque Issuer Credit Rating Certificate Of Deposit Senior Unsecured Short-Term Debt A-2 Subordinated BB+/Stable/B B cnbbb+ BB+ B BB+/Stable/B BB/Watch Pos/B BB/Stable/B --/--/B BBB/Negative/A-2 BBB/A-2 BBB BBB/Negative/A-2 BBB/A-2 BBB BB+ APRIL 30,

14 Ratings Detail (As Of April 30, 2014) (cont.) RCI Banque Sucursal Argentina Issuer Credit Rating Argentina National Scale raaaa/stable/raa-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com APRIL 30,

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