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CREDIT rating firm Moody’s Investor Service is poised to downgrade its financial ratings of nine car-makers as it predicts a global car sales slump of at least 20 per cent in 2020 that will take several years to return to 2019 levels.

The agency downgraded Toyota, BMW, McLaren, Ford, Renault, Nissan, Honda and Tata. (See details below).

In its latest corporate analysis, Moody’s said the pandemic has made the automotive industry “even more challenging” and will lead to it downgrading 40 per cent of car-makers as the virus adds to the industry’s already substantial challenges.

“We estimate light vehicle sales will slump at least 20 per cent in 2020 and will take several years to recapture 2019 levels, with any turnaround slowed by a supply shock coming simultaneously with plunging demand,” it stated in its latest report.

“That view prompted us to put essentially the entire industry on review for downgrade and cut ratings of nine of the 22 automakers we rate over the last three months.

“Total debt downgraded was about $US130 billion, excluding the debt related to the car-makers’ captive finance businesses.

“Even with our expectations for a solid recovery in 2021 (around 11.5 per cent) and 2022, based on Moody’s latest Macroeconomic Forecast, it will be years before auto sales return to the 2019 level.

“The risk to our forecast for the rest of this year is to the downside because it is predicated on a steady production recovery from factories that were closed for much of the second quarter.”

Moody’s said that the manufacturers in line for the credit downgrade had issues before the pandemic, including problems with their operations, lack of significant investments and major challenges to their market positions.

“In all cases, we felt the coronavirus outbreak and subsequent recession would exacerbate these problems,” it said.

“Strengths of automakers with confirmed ratings offer a chance for speedier recovery.

“Most automakers were not downgraded. These companies generally had track records of operational strength, little need for major restructuring, strong positions in core markets, geographic diversity or a premium brand focus and enough liquidity to weather even an extended downturn.

“Despite limited downgrades, 18 of 22 automakers have negative or developing outlooks. This acknowledges the potentially severe damage the recession could do to operating performance and credit.”

It said that several car-makers were historically strong performers and are likely to remain industry leaders, such as Toyota and BMW.

“Others, such as Ford Motor Company (Ba2 negative) face lengthy and significant restructuring challenges.”

Moody’s said that it was very unusual that the current pandemic-related shift was that demand dropped simultaneously with a supply shock.

“The prospects of a coordinated ramp-up of production and distribution in the context of weak demand creates a substantial degree of uncertainty for automakers,” it said.

“Our outlook for the auto industry turned negative in 2019, as global auto sales volume peaked about two years ago, particularly in developed regions.

“Last year, global light vehicle sales were down about five per cent and we were expecting another down year in 2020, even before the recession.

“In a minor stroke of luck for automakers, they were preparing for a downturn before the coronavirus spread across the world, meaning the reversal was not as sharp as it could have been if they were expecting 2020 to be another year of expansion.”

Though the outlook was a bit gloomy in the short term, Moody’s said liquidity was solid across the board and was much improved compared to 2008-2009.

“This level of liquidity gives us confidence in the auto manufacturers’ capacity to withstand an extended downturn in sales and provides a path to recovery once demand rebounds,” it said.

“Strong liquidity is a cornerstone of financial policy. Building on lessons learned in the Global Financial Crisis, auto companies kept sound profiles recognizing the impact of a cycle, even with considerable pressure.”

How Moody’s saw the auto performance risk:

Downgrades across the rating categories included: Toyota (to A1 negative); BMW (to A2 negative); McLaren (to Caa2 negative); and Nissan which fell to Baa3 negative.

“The rated Chinese companies were an exception, with the Chinese auto market showing quick and visible recovery, both in production as well as consumer demand,” Moody’s said.

It said Daimler AG (A3 negative), Volkswagen AG (A3 negative) and Volvo Car AB (Ba1 negative) were among those with confirmed ratings.

“They have well-established positions in their clearly defined markets, a focus on premium cars that tend to be more resilient during a downturn, and their exposure to China, which is the world’s largest auto market and the one we expect will recover quickest,” it said.

In its report, Moody’s examined car-makers including:

Ford: Its rating was cut to Ba2 in March as a result of the pandemic-related downturn, but its earnings and cash flow were weak for some time, and the company is in the midst of an extensive and expensive overhaul of its business, even by automotive standards. In the key China market, Ford suffered from operating inefficiencies, an aged product lineup, poor dealer relations and inattention to local market conditions. These factors led to a massive restructuring plan with $US11 billion of costs. As a result, we downgraded the company’s long term rating to Ba1 negative in September 2019, from Baa3 negative.

BMW: Was downgraded ahead of the market stress we expected from the coronavirus, but its financial performance was already declining, leaving it in a weak position at its prior A1 rating. The company’s EBITA margin fell steadily to 5.8 per cent in 2019, from 9 per cent three years earlier. Margins were down because of higher raw material prices, foreign exchange, distortions caused by European emission testing provisions and trade rules implemented by the US. That was on top of rising capital spending and research & development costs to meet European CO2 emission targets for this year.

Renault: Its profitability and free cash flow generation have declined significantly since 2017 and in February, we downgraded the long term rating to Ba1. The weaker performance was because of lower unit sales, negative product mix effects, inability to pass on raw material costs and adverse foreign exchange effects, as well as a materially declining contribution from its alliance partner Nissan. The coronavirus downturn, along with capital requirements needed to address CO2 emission compliance and electrification of its fleet, will continue to be challenges to Renault’s profitability and cash flow generation.

Toyota: It had its outlook cut to negative in January, driven by increasing environmental standards, required investments for autonomous and electric vehicles. With the emergence of the coronavirus and the volatility it created, we lowered its ratings to A1 in March. The pandemic and subsequent recession will result in deterioration in credit quality for the foreseeable future, despite Toyota’s long history of industry leading financial metrics.

Honda: Its profitability was weak going into the recession. Performance declined for several years because of increasing competition in the medium-sized and small car segments, markets in which Honda holds strong positions. The declining profitability, combined with the need to make substantive R&D investments, will further challenge the company. The coronavirus outbreak will exacerbate the pressures that Honda was facing and will hurt demand, particularly in emerging markets vital to Honda.

Nissan: It had a record of substantial margin declines because of sales incentives offered by its North American segment to gain market share, an aging product lineup and foreign exchange fluctuations. The poor performance resulted in the rating being downgraded to Baa1 in January. The pandemic comes at a time when Nissan is attempting to refresh old models, rebuild its brand strength and rejuvenate its fractured relationship with Renault.

McLaren: Its rating was lowered to Caa2 from B3 because of a rapidly eroding liquidity profile. We believe additional funding is required and the outcome of the company’s efforts to obtain funding, as well as the outcome of discussions with lenders, is highly uncertain. The rating additionally takes into account McLaren’s weak metrics, including very high leverage for at least the next 24 months and ongoing negative free cash flow.

Tata Motors: Its ratings were downgraded several times and were under pressure again before the coronavirus outbreak. We have maintained a negative outlook on the company since November 2018, with the company’s metrics deteriorating over the past several years because of falling demand and lower sales in Tata’s key markets and product development spending that resulted in consistent negative free cash flow. The downgrade to B1 reflects the coronavirus amplifying the struggles the company already faces

Peugeot: Has a Baa3 negative rating. It does well in European light vehicles, but its greatest strength is its flexible cost structure that helped it consistently increase margins over the past three years. That cost structure will help shield the company from a prolonged downturn.

General Motors: Has a Baa2 negative rating. It is the leading North American manufacturer and, over the past several years, took profound steps to strengthen operations and focus on leadership in electrification and autonomous driving. GM exited low-return businesses and regions to concentrate on its exceptionally strong truck franchise, while maintaining a leading position in China.

Geely Automobile: Has a Baa3 stable rating. It is competitive in China’s growing passenger vehicle market, and most of its products are sold in China, which is expected to rebound at a faster rate than other regions. Since 2018, Geely kept its market share while maintaining prudent financial policies.

Hyundai Motor Company and Kia Motors: Each with a Baa1 negative rating. Their fundamentals were improving since 2019 with better product mix in key markets and strong balance sheets. We expect the contraction in their 2020 sales to be less severe than the global average, given the resilience of their domestic market and increasing market shares in the US.

By Neil Dowling

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