PARIS (S&P Global Ratings) June 3, 2020--Renault S.A. still has work to do. S&P Global Ratings said today that benefits from the French car manufacturer's plans to reduce fixed costs, alongside the reshaping of its strategic alliance with Nissan and Mitsubishi, won't substantially alleviate pressure on its credit quality (BB+/Negative/B). In our view, Renault continues to face obstacles arising from the execution, timing risks, and potential difficulties delivering its imminent CO2 obligations from end-2020.
By 2022, Renault expects to decrease its fixed costs by about EUR2.15 billion, or 20% annually, from 2019 levels. The group intends to pull savings mainly from its engineering, marketing, and production units. Cash implementation costs will amount to about EUR1.2 billion, with 30%, 50%, and 20% split over 2020, 2021, and 2022, respectively. Part of the efficiency gains relates to an increasing communalization of parts and rationalization of subcontractors under the leadership of engineering chief Mr. Gilles Le Borgne, who built a track record of successful implementation in his prior role as director of research and development at PSA group. We believe his experience will be particularly helpful with the execution of the planned cost reductions. Nevertheless, Renault has yet to nail down specifics of its cost-reduction plan, such as the definitive agreements with employee representatives on the 15,000 jobs likely affected worldwide. In addition, the company still faces complications from likely low or no contribution from Nissan, which is currently committed to its own unprecedented restructuring effort. Combined, these risks could prevent Renault from restoring its EBITDA margin to at least 6% by 2022. Failure to do so over the next 24 months would indicate pronounced pressure on Renault's creditworthiness.
The strategic alliance between Renault, Nissan, and Mitsubishi has fallen short of providing material cost benefits. Deteriorating performance at the latter two groups over the past years underscores the shortcomings. We attribute this to the lack of a truly common strategy and of substantial industrial overlap among the alliance members. This leads us to think the alliance's new "leader-follower" strategy might also fail to meaningfully support Renault's recovery. The alliance plans to extend collaboration from the powertrain to the upper body of new vehicles in order to save on investments. However, implementation will be gradual because this will only apply to the next generation of models. By 2025 at the earliest, about 50% of the alliance's models will be developed under the new scheme. Furthermore, we expect Nissan's contribution to Renault's results to remain limited in the short term. Under its transformation plan, Nissan targets an operating margin of above 2% only by the fiscal year ending March 2022.
The French government has announced a series of measures to support car sales and reduce inventories, with a particular emphasis on electric and hybrid cars. This should benefit automakers as French consumers could receive up to EUR12,000 to buy an electric car. Nevertheless, the overall benefit will be limited in that the subsidies will only apply to the first 200,000 cars sold, and cover both new and used cars. Besides, we continue to assume the contribution of electric car sales to operating margin is lower than traditional internal combustion equivalents, leaving little room for noticeable improvements in the profitability. As such, we see downside risk to our base-case forecasts for Renault, notably related to the extent of the pick-up in demand and potential non-compliance with the tightening CO2 emission target by end-2020 in Europe.
As previously anticipated, the French state has now extended liquidity support to Renault. The state will guarantee 90% of a new EUR5 billion credit facility. In first-quarter 2020, Renault's liquidity decreased by about EUR5.5 billion, leaving the company with cash and available credit lines of about EUR10.8 billion (excluding the new EUR5 billion guaranteed credit facility) at the end-March 2020. Assuming monthly fixed costs of about EUR0.8 billion-EUR1.0 billion before furlough schemes, we assume Renault has enough liquidity to cope with temporary large working capital outflows that should reverse as soon as sales resume.
This report does not constitute a rating action.
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