DBRS Morningstar Changes Trend on Stellantis N.V. to Positive from Stable, Confirms at BBB

DBRS Limited (DBRS Morningstar) changed the trends on Stellantis N.V.’s (Stellantis or the Company) Issuer Rating and Senior Unsecured Debt rating to Positive from Stable and confirmed both ratings at BBB. Concurrently, DBRS Morningstar changed the trend on the Senior Unsecured Debt rating of Stellantis Finance US Inc. to Positive from Stable while confirming the rating at BBB. The rating actions incorporate the Company’s favourable recent financial performance that has bolstered its financial risk assessment (FRA) to solid levels. While DBRS Morningstar recognizes that Stellantis’ current operating performance partly reflects inordinately strong pricing (given the ongoing scarcity of new vehicles) that is likely to moderate over the near term, the Company’s FRA is nonetheless expected to persist at levels exceeding the currently assigned ratings, which remain supported by Stellantis’ sound business risk assessment as a major automotive original equipment manufacturer (ranking fourth in global sales volumes, per 2020 data) with a strong brand portfolio.

Stellantis’ earnings performance in H1 2021 has been solid, with its pro forma adjusted operating margin being at 11.4%. This included a very strong operating margin of 16.1% in North America. While revenue growth was constrained (albeit sales were still considerably higher vis-à-vis very weak H1 2020 levels) by the semiconductor shortage, earnings were markedly bolstered by firmer product mix and very favourable pricing that reflects the continuing disconnect between prevailing vehicle demand levels and available supply. For 2021, the Company has indicated that it expects its annual adjusted operating income to amount to approximate 10%, DBRS Morningstar deeming Stellantis’ guidance well attainable. Going forward, DBRS Morningstar expects industry pricing to moderate considerably in line with the progressive resolution of the semiconductor shortage and other supply base challenges (that may persist well into 2022). Moreover, rising raw material prices and increasing product development costs (significantly reflecting the progressive electrification of Stellantis’ automotive fleet) represent additional headwinds. However, DBRS Morningstar expects these to be considerably offset by sales growth (as industry volumes are estimated to revert to pre-pandemic levels by 2023) and synergies (generated through the integration of the former Fiat Chrysler Automobiles N.V. (FCA) and Peugeot SA (PSA)). As such, while margins are anticipated to soften, DBRS Morningstar nonetheless projects Stellantis’ operating margins to persist in the high single-digit range over the medium term.

DBRS Morningstar also notes that Stellantis’ liquidity position remains substantial, with industrial cash balances as of June 30, 2021, being in the amount of EUR 40.9 billion, supplemented by available credit lines of EUR 10.5 billion. Subsequent to H1 2021, the Company, in July 2021, attained a new syndicated revolving credit facility (RCF) in the amount of EUR 12 billion (the new facility replacing the former RCFs of PSA and FCA). In line with the above, DBRS Morningstar deems Stellantis’ liquidity position readily capable of absorbing any foreseeable lingering effects of the Coronavirus Disease (COVID-19) pandemic, the global semiconductor shortage, and other supply base constraints, with the Company’s overall financial profile being deemed well sufficient to fund sizable capital expenditures and increasing dividends (in line with progressive earnings growth).

Consistent with the Positive trends assigned to the ratings, ongoing solid operating performance of Stellantis in line with DBRS Morningstar’s expectations amid headwinds in the form of rising material costs and continued (albeit likely to moderate) supply base challenges would likely result in an upgrade of the ratings in the next year. Conversely, significantly weaker earnings amid ongoing high investments—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could have negative rating implications, although DBRS Morningstar deems such a scenario rather unlikely.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021; https://www.dbrsmorningstar.com/research/385892) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is 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 ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021) was the primary rating methodology applied in determining the rating of parent company Stellantis N.V. Subsequently, DBRS Morningstar Criteria: Guarantees and other Forms of Support (May 31, 2021) was applied in determining the determining the rating of Stellantis Finance US Inc., which benefits from a guarantee of Stellantis N.V. The guarantee, in combination with DBRS Morningstar’s assessment of additional implicit support considerations, including (but not limited to) business, reputational, and financial factors (that are deemed likely to motivate a parent or affiliated company to support its subsidiary issuer), results in a flow through of Stellantis N.V.’s rating to Stellantis Finance US Inc.

For both Stellantis N.V. and Stellantis Finance US Inc., this is the first rating action since the Initial Rating Date.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Dates: Stellantis N.V. – January 27, 2021
Stellantis US Finance Inc. – September 15, 2021

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2021)
https://www.dbrsmorningstar.com/research/385892
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021)
https://www.dbrsmorningstar.com/research/379424