Frankfurt am Main, October 25, 2012 -- Moody's Investors Service has today affirmed the Ba3 Corporate Family Rating ("CFR") of Faurecia S.A. as well as the Ba3 rating on Faurecia'sEUR 490 million senior guaranteed notes due 2016, the B2 rating on its EUR 250 million senior notes due 2019 and the B2 rating on its EUR 250 million convertible notes due 2018. The outlook on the ratings has been changed to negative from stable.
"The outlook change to negative has been triggered by the reduced earnings guidance for the full year 2012 communicated by Faurecia this week." says Rainer Neidnig, a Moody's Vice President and lead analyst for Faurecia. "We now expect that Faurecia will not achieve break-even free cash flow in the second half of this year and that full year credit metrics will likely be weak for the rating category. The negative outlook reflects the possible challenges to maintain profitability and leverage ratios in line with the Ba3 rating category against the backdrop of an uncertain economic environment, in particular in Europe".
The affirmation of Faurecia's Ba3 corporate family rating reflects Moody's view that the earnings decline is primarily caused be a cyclical decline in European car production volumes and that Faurecia's competitive position remains strong as evidenced by solid revenue growth outside Europe. Although Moody's expects credit metrics for the full year 2012 to be weak for the rating category, we expect them to remain broadly in line with Faurecia's Ba3 corporate family rating through the cycle. Increasing confidence in this respect would very likely result in a stabilization of the rating outlook.
On October 23rd, Faurecia has trimmed its operating profit expectation for 2012 to "above EUR 500 million" as weak demand for new cars results in lower than expected production volumes of light vehicles in Europe. Previously, the company expected an operating profit of EUR 560 million to EUR 610 million.
In the third quarter of 2012, Faurecia reported a revenue decline of 4.2% in Europe on a like-for-like basis which compares to an overall market decline in Europe of 5.9% according to Faurecia. At the same time Faurecia achieved further solid revenue growth outside Europe, most notably in North America, where revenues increased by 19% on a like-for-like basis in the third quarter of 2012. Moody's expects that growth in other regions helps mitigating the earnings decline in Europe during 2012.
Because of lower than expected earnings and ongoing investments in future growth, Moody's believes Faurecia will fail to achieve break-even free cash flow in the second half of 2012 and report significant negative free cash flow for the full year though we recognize that the significant growth capex program is an important driver. At the same time Moody's expects Faurecia to achieve an EBIT-margin of close to 2% on a Moody's adjusted basis in 2012 and yearend debt/EBITDA close to 4.5x.
Moody's currently forecasts demand for new cars and light commercial vehicles in Western Europe to decline moderately by 3.0% in 2013 whereas we expect global demand to grow by 2.9%. Based on these estimates Moody's expects Faurecia should be able to maintain profitability and leverage levels next year and to gradually improve them going forward absent a significant deterioration in market conditions. This view is based on cost adjustments taking hold and an increasing profitability outside Europe as costs caused by the recent rapid expansion should reduce. Moody's also expects Faurecia to return to break-even free cash flow generation by the end of 2013 as the company said it will limit capital expenditures and capitalized development R&D to EUR 800 million per year during 2012-2014. However, Moody's cautions that the future financial performance of Faurecia remains highly dependent on the overall macroeconomic environment and that visibility for new car and light commercial vehicle production volumes in 2013 and beyond is very limited.
The Ba3 CFR remains supported by Faurecia's solid business profile. In particular, Moody's views (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 57% of product sales in the first nine months of 2012 and to core customers Volkswagen (A3, positive outlook) and Peugeot (PSA) (Ba3, negative outlook). 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.
Faurecia's liquidity might be negatively impacted by the weaker than expected cash flow generation which largely offsets the positive liquidity impact of Faurecia's successful EUR 250 million convertible notes issue in September. 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 December 2014 and EUR 460 million mature in December 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. Moody's further notes that Faurecia's core credit facilities contain conditionality language in the form of financial covenants. Covenant headroom as of June 2012 has been adequate but Moody's cautions that it might tighten, if earnings continued to decline.
The negative outlook reflects the substantial negative free cash flow generation in the current year and the challenge to maintain profitability and leverage ratios in line with the Ba3 rating category against the backdrop of an uncertain economic environment, in particular in Europe. The outlook would likely be changed back to stable upon increasing visibility that Faurecia can return to positive free cash flow generation and achieve an EBIT-margin of at least 2% as well as leverage at levels of 4x debt/EBITDA or lower through the cycle.
Moody's would consider to downgrade Faurecia's ratings, should EBIT-margins fall below 2% or in case of recurring negative free cash flow generation. Likewise, a significant increase in leverage such as debt/EBITDA rising materially above 4x for a longer period, a weakening liquidity profile or a tightening of covenant headroom could result in a downgrade.
An upgrade is unlikely at this stage, but would be considered should Faurecia manage to achieve EBIT-margins of 3% or higher, positive free cash flow generation, and 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.
Moody's views Faurecia's relationship with majority shareholder PSA primarily as a commercial challenge. However, Moody's cautions that this challenge may further increase given the weak operating performance and the weakening credit profile of PSA which creates an additional source of potential risk. Faurecia's ratings continue to reflect Moody's expectation that financing arrangements of Faurecia and PSA remain separated in future. This view also 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.
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.
Headquartered in Paris, France, Faurecia group is one of the world's largest automotive suppliers for seats, exhaust systems, exteriors and interiors. In 2011, group revenues amounted to EUR 16.2 billion. The group operates along four divisions: Automotive Seating, Interior Systems, Emission Control Technologies and Automotive Exteriors. The parent company, Faurecia S.A., is a holding company which directly and indirectly provides financial, accounting, general management and administrative services to the group. Faurecia S.A. is listed on the Paris stock exchange. The largest shareholder is PSA Peugeot Citroën which holds 57% of Faurecia's shares and 73% of voting rights. The remaining shares are in free float.
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Rainer Neidnig Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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