DBRS Morningstar Changes Trend on Renault S.A.’s Issuer Rating to Positive from Negative, Confirms Credit Rating at BB (high)

DBRS Limited (DBRS Morningstar) changed the trend on Renault S.A.’s (Renault or the Company) Issuer Rating to Positive from Negative and confirmed the credit rating at BB (high). The credit rating actions incorporate the Company’s ongoing earnings improvement, which has resulted in a strengthening of its financial risk assessment (FRA) with the industrial operations attaining a net cash position. Moreover, potential proceeds from Renault’s monetization of a 28.4% stake in Nissan Motor Co., Ltd. (Nissan; rated BBB (low) with a Stable trend by DBRS Morningstar), thereby reducing the Company’s ownership position in Nissan to 15%, in addition to a targeted initial public offering (IPO) in its electric vehicle business Ampere, appear to present Renault with meaningful additional flexibility as it undertakes additional investments toward the electrification of its vehicle portfolio and the development of new mobility businesses.

The Company’s 2022 earnings performance improved year over year, with Renault's automotive division attaining an operating margin of 3.3% (relative to essentially breakeven operating results the prior year). Contributing factors included stronger pricing and firmer product mix; these were partly offset by cost increases, including higher raw material and purchasing costs. Through the first half of 2023, earnings performance continued to trend favourably with the automotive segment attaining a sound operating margin of 6.2%; Renault’s earnings continued to benefit from firm pricing and product mix in addition to higher volumes, partly offset by ongoing cost headwinds. Going forward, despite market headwinds that notably include interest rate/inflationary pressures, geopolitical uncertainty, and an associated weakening in consumer sentiment, DBRS Morningstar anticipates Renault’s earnings to be rather resilient to these challenges given the Company’s continued product offensive (that has meaningfully bolstered its pricing and per-unit revenue) and attained efficiencies that have resulted in a 50% reduction in its breakeven point (in volume terms, relative to a 2019 base).

Moreover, Renault appears reasonably well positioned to withstand the sizable cost and investment requirements facing the automotive sector in line with the progressive electrification of the industry amid additional forays into new mobility businesses. Through the restructuring of its automotive alliance (the Alliance) with Nissan and Mitsubishi Motors Corporation, the Company recently transferred a 28.4% ownership interest in Nissan to a French trust, with Renault likely to commence divesting these holdings in 2024. Additionally, the Company continues to target the IPO of a minority stake in Ampere next year, subject to market conditions. DBRS Morningstar estimates that the total proceeds of these transactions could readily exceed EUR 5 billion, thereby meaningfully alleviating Renault’s medium-term investment burden. Regarding the Company’s liquidity position (absent the potential divestitures outlined immediately above), DBRS Morningstar considers this to be sound. As of June 30, 2023, the liquidity position of the Company’s automotive segment amounted to EUR 16.8 billion (consisting of EUR 13.5 billion in cash balances and EUR 3.3 billion in available committed credit lines). DBRS Morningstar deems this sufficient in the context of moderately positive gross free cash flow (i.e., before working capital effects) projected over the near to medium term, with the automotive business also benefitting from ongoing dividends from the financial services segment.

Consistent with the Positive trend, continued operating performance over the next 12 to 18 months remaining essentially consistent with recent results (allowing for some slight moderation thereof recognizing the above-cited cost and investment headwinds) would likely result in an upgrade. Conversely, markedly weaker earnings—resulting in material negative free cash flow and thereby adversely affecting credit metrics—could result in negative credit rating actions, although DBRS Morningstar deems a downgrade rather unlikely given the meaningful cushion afforded by Renault’s FRA within the current credit rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the Environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represents a relevant factor as Renault is subject to a wide range of environmental compliance requirements relating to carbon dioxide, fuel efficiency, emissions control, and other factors. In the event that the Company would not comply with applicable regulations, significant penalties and reputational harm could result. Correspondingly, in 2021, Renault announced its climate strategy that outlined its aim to achieve carbon neutrality in Europe by 2040 and worldwide by 2050 by reducing its carbon emissions over the entire lifecycle of the vehicle. Moreover, given its five common electric platforms covering most segments, the Renault brand aims to become 100% electric by 2030 for passenger cars in Europe. As a function of these objectives, Renault and the Alliance have publicly targeted EUR 23 billion in electrification investments over the 2022–26 time period.

While the Environmental factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the credit rating or the trend assigned to Renault.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

Notes:
All figures are in euros unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 11, 2023; https://www.dbrsmorningstar.com/research/421716)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit 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 credit ratings:

The last credit rating action on this transaction took place on December 2, 2022, when DBRS Morningstar confirmed Renault S.A.’s Issuer Rating at BB (high) with the trend remaining Negative.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

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 credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Tom Currie, Managing Director, Global Fundamental Credit Ratings
Initial Rating Date: August 31, 2006 (Benchmark: November 27, 2000)

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this credit rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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