oDespite Renault's marked recovery in performance in the second half of last year, adjusted debt to EBTIDA (leverage) increased materially versus peers' in 2020 to 10.9x from 0.5x in 2019, with the company's cash burn exceeding EUR4 billion.
oThat said, we believe Renault's deleveraging will be swift and sustainable, thanks to gradually improving margins, cost reductions, and a generous return on some of the group's assets, in particular dividends from its sales-financing arm RCI.
oWe are therefore affirming our 'BB+/B' long- and short-term ratings on Renault as well as our 'BB+' issue rating on the group's unsecured debt.
oThe negative outlook reflects the group's limited rating headroom amid uncertain market recovery prospects in Europe in particular, exacerbated by raw material cost inflation, and a potential shortage of semiconductors. We see this uncertainty as underscored by the company's lack of guidance for 2021.
MILAN (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
We believe that Renault will be able to reduce leverage from the elevated level in 2020, thanks in part to profitability gradually improving through 2022.
We expect that Renault'sS&P Global Ratings-adjusted debt to EBITDA will recover toward the 2019 level of 0.5x by 2022 from 10.9x in 2020. This reduction is supported by our projection, under our updated base case, that Renault'sS&P Global Ratings-adjusted operating margin will likely recover toward 6% in 2022 from a mere 1.3% in 2020. We see this trend as hinging on recovering volume and pricing effects, but also pressured by margin dilution from the shift toward a higher share of electrified vehicles to comply with tighter carbon emission regulations in Europe. We no longer expect profitability to reach 6% by the end of this year though, given our view of uncertain market recovery prospects in Europe, where the group realizes the bulk of its earnings. We don't believe that a potentially softer recovery impairs Renault from strengthening its underlying profitability, even without dividends paid by Nissan. Our scenario includes ongoing restructuring charges in 2021 and 2022, albeit lower than what the group posted in 2020.
Dividends from Renault's fully owned sales-financing business RCI Banque will be a key pillar of the group's deleveraging.
The European Central Bank (ECB) may lift its restrictions on European banks' distribution of dividends in 2021, but unlikely before the fourth quarter. In our base case, we assume Renault will receive distributions from RCI of about EUR1 billion this year, and annual dividends exceeding EUR500 million in 2022 and 2023. We note that these dividends are not reflected in Renault's adjusted free cash flow generation, but captured in the group's cash surplus.
Renault's progress on its cost-reduction plan supports our margin projects and the improvement of automotive free cash flow.
A critical share of cost economies the group has achieved so far (EUR800 million) in the context of its EUR2 billion cost-reduction plan launched in 2019 is on future research and development (R&D). We see R&D costs and capital expenditure (capex) as being on a declining trend from 2021. Net R&D and capex have represented about 9%-10% of group revenue over the past four years. One of the key assumptions in our updated base case is a gradual reduction of these costs to 8% by 2023. This is made possible by the completion of an investment cycle into platforms shared with Nissan for products to be launched from 2023. We believe convergence toward common platforms will deliver consistent synergies and cost savings, which will likely reduce the margin dilution we include in our projections for 2021-2022.
We expect recovery of the group's automotive free cash flow will be gradual, returning to positive figures in 2022.
For 2021, we expect automotive free cash flow generation at Renault will remain negative (at about EUR300 million-EUR400 million) after consideration of restructuring charges and before considering any dividend payable by RCI, after negative EUR4.3 billion in 2020.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects.
Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
The negative outlook reflects limited headroom in the current rating along with headwinds to market recovery prospects in Europe in particular, given the uncertain evolution of the COVID-19 pandemic. We see Renault's 2021 performance as clouded by raw material price increases and a potential shortage of semiconductors for the global auto industry. This uncertainty is, in our view, reflected in the absence of guidance by Renault for 2021.
We could lower the rating if the group struggled to progress markedly toward an S&P Global Ratings-adjusted EBITDA margin of about 6%, and achieve debt to EBTIDA below 3x and FOCF to sales of 1% in 2022.
We could revise our outlook on Renault to stable if the company restores its EBITDA margin to above 6%, lowers its debt to EBITDA below 3x, and posts FOCF to sales of 1%-2% in 2022.
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oCriteria | Corporates | General: Methodology: The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
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