Frankfurt am Main, September 10, 2012 -- Moody's Investors Service has today affirmed the Ba3 Corporate Family Rating ("CFR") of Faurecia S.A. Concurrently, Moody's has assigned a B2 (LGD6-92%) rating to the convertible notes due January 2018 proposed by Faurecia S.A. The outlook on the ratings is stable.
The proposed convertible notes worth up to EUR 250 million constitute unsubordinated and unsecured obligations of the issuer Faurecia S.A. Noteholders have the right, but are not required, to convert their notes at their option for new or existing shares of Faurecia S.A. The issuer is the parent company of Faurecia group and a holding company. It does not own or operate tangible assets and therefore relies on funds provided by its operating subsidiaries to service its financial obligations.
The B2 rating of the proposed convertible notes is two notches below Faurecia's Ba3 CFR which reflects their structural subordination to the financial obligations of Faurecia S.A.'s operating subsidiaries including financial debt, trade payables and pensions, as well as to the EUR 490 million of guaranteed notes and the EUR 1,150 million revolving credit facility issued by Faurecia S.A. which benefit from upstream guarantees of operating subsidiaries representing approximately 73% of group EBITDA for the last-twelve-months period ended June 2012.
Faurecia intends (i) to extend the average maturity of its debt and to diversify its financing resources with the proposed issuance and (ii) use the proceeds of this issuance for general corporate purposes and, in particular, to finance its business expansion plans.
The Ba3 corporate family rating (CFR) is supported by Faurecia's solid business profile. In particular, we view (i) the large size of Faurecia's operations, (ii) its global presence, (iii) solid market positions (among top three players in relevant markets according to management data) and (iv) established customer relationships with most of the global original equipment manufacturers (OEMs) as credit strengths. However, Faurecia is strongly reliant on cyclical new light vehicle production volumes as it lacks any non-automotive activities and a material aftermarket business. Moreover, the group is strongly exposed to its European home market where it generated 59% of product sales in the first half of 2012 and to core customers Volkswagen (A3, positive outlook) and Peugeot (Ba2, rating under review for downgrade). The rating also reflects the general risks to which virtually all automotive suppliers are exposed, i.e. high level of competition and strong bargaining power of OEM customers. The Ba3 CFR balances Faurecia's poor profitability and weak credit metrics in the past against improvements in 2010 and 2011 which we attribute not only to the rebound in global car production volumes but also to structural improvements at Faurecia. The assigned CFR is based on our opinion that Faurecia will maintain these improvements and sustainably achieve EBIT-margins of at least 2% and debt/EBITDA close to or below 4x on a Moody's adjusted basis. Moody's calculates debt/EBITDA of 3.8x and an EBIT-margin of 3.1% for the last twelve months period ending 30 June 2012.
Moody's views Faurecia's relationship with majority shareholder Peugeot S.A. (PSA) (rated Ba2, rating under review for downgrade) primarily as a commercial challenge given the weak operating performance of PSA. Because Faurecia has managed to substantially reduce its exposure to PSA such that it accounted for only 14% of revenues in the first six months of 2012, we believe Faurecia can manage this challenge. However, Moody's cautions that the recent weakening of PSA's credit profile could create a potential source of additional risk should PSA turn to Faurecia for financial support. The rating continues to reflect our expectation that financing arrangements of Faurecia and PSA remain separated in future. This view considers Faurecia's responsibilities to its minority shareholders and that Faurecia's existing credit agreements place limits on the payment of dividends and the incurrence of additional debt. As at 30 June 2012, PSA holds 57% of Faurecia S.A.'s shares and 73% of the voting rights.
The proposed issuance will help improve Faurecia's liquidity profile such that Moody's would consider it to be adequate for the rating category in Moody's view if the maximum issue amount of approximately EUR 250 million can be successfully placed. As of June 2012, Faurecia had a sizeable cash position of EUR 800 million and available commitments of EUR 730 million under its existing EUR 1,150 million core credit facility (EUR 690 million mature in November 2014 and EUR 460 million mature in November 2016). However, the company also had sizeable short-term debt maturities (EUR 725 million) and off-balance sheet short-term factoring activities (EUR 377 million). Moody's views positively that Faurecia was able to rely on its relationship banks during the 2009 recession and also that according to management data its factoring arrangements worked well also in the middle of the industry downturn. However, we note that Faurecia's core credit facilities also contain conditionality language in the form of financial covenants.
The stable outlook reflects Moody's view that Faurecia will be able (i) to maintain EBIT-margins of at least 2% and debt/EBITDA close to 4x or lower on a Moody's adjusted basis through the cycle and (ii) come close to break-even free cash flow in 2013 with clear visibility of positive free cash flow thereafter.
WHAT COULD CHANGE THE RATING UP/DOWN
A rating upgrade would be considered should Faurecia manage to achieve (i) EBIT-margins of 3% or higher, (ii) positive Free Cash Flow generation, and (iii) a debt/EBITDA ratio below 3.5x through the cycle on a sustainable basis. An improvement of Faurecia's liquidity profile is also a critical consideration for an upgrade.
Downward pressure on the rating would arise in case of a deterioration in earnings and cash flow generation reflected in recurring negative Free Cash Flow or EBIT-margins below 2%. In addition, pressure on the rating could evolve should debt/EBITDA rise again materially above 4x or if the availability of short-term liquidity lines and/or factoring capacity for Faurecia reduces significantly.
The principal methodology used in rating Faurecia S.A. was the Global Automotive Supplier Industry Methodology published in January 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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