Renault could accelerate back into investment grade territory
30 April 2010
Things are looking up for Renault. The company reported better-than-expected Q110 figures this week. Its total revenues grew by 28% YoY to €9.1bn, well above both average analyst estimates of €8.7bn and the 23% YoY rise in revenues (on a like-for-like basis) reported by closest peer Peugeot. Like most of the major autos, Renault is enjoying a rebound in European demand. Its sales there rose by nearly 38% YoY in Q110. And the company significantly increased its market share in its main markets of France, Germany and Italy, mainly due to the success of its Mégane family. Even outside Europe, Renault’s sales remain on a firm upward trend. Revenues there rose by 21% YoY in the quarter, supported by strong growth in Asia/Africa and the Americas regions. But while the company is clearly benefiting from an improving operating performance, it is a totally separate factor that could provide a significant boost to its credit profile in the near term. In particular, the company has pledged to reduce net debt through asset disposals and momentum is building for a sale of its stake in Swedish truck-maker Volvo AB. This, crucially, could pave the way for Renault (currently rated Ba1/BB/BB) to once again return to investment grade territory.
Renault’s Q110 group consolidated revenues by activity
Source: Fitch. Data for 2009 has been restated on a comparable basis with 2010
Renault’s has a 21.8% holding in Volvo. This was acquired in exchange for the sale of its truck operations, Renault Vehicule International, to Volvo back in 2001. The stake is non-strategic and has long been viewed as enhancing Renault’s financial flexibility, given that it could be sold off to raise cash. However, in the years that followed the acquisition, Renault had little reason to consider such a sale. It remained comfortably profitable throughout much of the 2000s and its credit ratings stayed firmly in the triple B category, even migrating upwards from BBB to BBB+ between 2001 and 2005. But the onset of the global financial crisis changed the status quo significantly. As the global auto sector suffered a significant pullback in demand, Renault struggled to keep its head above the water. In 2008, Renault burned through €3bn in automotive free cash flow and its automotive net debt position tumbled to €7.9bn. And despite the French government stepping in with a €3bn loan, Renault’s ratings were cut to junk status by all three rating agencies in the first half of 2009. At the same time, the global truck market was also reeling from the downturn, meaning that Renault’s take in Volvo was worth much less than before.
Renault’s automotive net debt and credit rating development 
Source: Daiwa Capital Markets Europe Limited, S&P
However, the past few months have seen the tables turn yet again. The tentative global economic recovery has led to the start of a rebound in the global automotive and truck markets, while share prices have improved across the board. These factors mean that Renault’s stake in Volvo is becoming increasingly attractive to outside investors. At the same time, Renault is likely to be very keen to return to investment grade status. Although the company no longer faces an acute liquidity shortfall and is forecasting positive free cash flow for 2010, selling its take in Volvo, estimated to be worth around €4bn, would be the quickest way to achieve this. Assuming the proceeds from any sale are used purely to reduce debt, this would wipe out a significant chunk of Renault’s automotive net debt, which stood at €5.9bn as at end-2009. This would bring this key metric back to a level when Renault’s ratings were in the BBB/BBB+ category. Therefore, Renault could look forward to a significant ratings uplift. A one, or possibly two, notch rating upgrade would push its ratings firmly back into investment grade territory, although the ultimate rating level would also be influenced by many other factors, including the strength of the economic recovery and the development of auto sales as government incentive measures are withdrawn. But as Volvo’s share price continues to soar, a sale of the stake is likely to become increasingly attractive to Renault. A recent survey by Bloomberg suggests that 112.5 kronor would be most likely price at which a sale could be triggered. Given that Volvo’s share price hit 90 kronor at the close of business yesterday, and is still rising, a sale could be imminent.
Nicola Sanders - Credit Analyst
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