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Fitch Affirms Faurecia at 'BB'; Outlook Stable
April 7, 2017 / 3:59 PM / 6 months ago

Fitch Affirms Faurecia at 'BB'; Outlook Stable

(The following statement was released by the rating agency) LONDON/BARCELONA, April 07 (Fitch) Fitch Ratings has affirmed Faurecia's S.A.'s Long-Term Issuer Default Rating (IDR) and senior unsecured debt at 'BB'. The Outlook on the Long-Term IDR is Stable. The ratings reflect the auto supplier's solid positions in the segments it covers, as well as the recent strengthening of key credit ratios and our projections of a further moderate improvement in 2017-2018. However, the ratings are constrained by the company's weak free cash flow (FCF), which is just at around breakeven. KEY RATING DRIVERS Leading Market Positions: Faurecia's ratings are supported by its diversification, size and leading market positions as the eighth-largest global automotive supplier. Its large and diversified portfolio is a strength in the global automotive market, which is being reshaped by the development of global platforms and the acceleration of new technologies and demand from large manufacturers. Fitch also believes that the group is well positioned in some fast-growing segments to outperform the overall auto supply market, notably by offering products increasing the fuel efficiency of its customers' vehicles. Business Refocus: We believe that the exterior business (FAE) disposal in 2016 is an illustration of the group's aim to gradually refocus its business. We expect Faurecia to use some of the FAE proceeds to acquire businesses active in higher added-value and faster-growing segments and to accelerate investment in sustainable mobility and the interior business. This should help address some of the longer-term risks associated with Faurecia's smaller exposure to fast-growing and more profitable segments such as connectivity and autonomous driving, compared with large peers such as Continental and Bosch. Sound Diversification: Faurecia's healthy diversification by product, customer and geography can smooth the potential sales decline in one particular region or lower orders from one specific manufacturer. Its broad industrial footprint matching its customers' production sites and needs enables Faurecia to follow its customers in their international expansion. Faurecia has greatly reduced its dependence on some of its large historical customers and no manufacturer now represents more than 20% of product sales. Improving Earnings: The operating margin, based on total sales, strengthened to 5.2% in 2016 from 4.4% in 2015 and we expect a further progression to more than 6% through 2019. Based on value-added sales, we project the operating margin to reach 7.5% in 2019, a level more in line with close peers and a 'BB' rating. Cash generation is also improving to levels more commensurate with the 'BB' category with the FFO margin increasing to 6.3% in 2016. Weak FCF: The FCF margin just around 0% remains weak for the rating after adjusting for derecognised trade receivables that boosted working capital and, in turn CFO and FCF. We project that the FCF margin will increase gradually to just more than 1.5% by 2019 as the company further optimises its cash conversion and working capital, but this incorporates a lower capex ratio than close competitors. Stronger Financial Structure: Faurecia's financial structure improved further in 2016 following the FAE disposal and thanks to better underlying FFO, leading FFO adjusted net leverage to decline to 1.7x at end-2016 from 2.3x at end-2015 and 3.2x at end-2014. However, we believe that a modest increase in dividends and potential small acquisitions with part of the FAE proceeds will limit the improvement in leverage in 2017-2018. We project FFO adjusted net leverage will decrease gradually to just above 1x by end-2019 in the absence of major acquisition. Weak Linkage with PSA: We applied our parent and subsidiary rating linkage (PSL) methodology and assessed that Faurecia has a slightly weaker credit profile compared to its parent PSA (46.3% stake and 62.9% voting rights). We also deem the legal, operational and strategic ties between the two entities weak enough to rate Faurecia on a standalone basis. DERIVATION SUMMARY Faurecia's business profile compares adequately with auto suppliers at the high-end of the 'BB' rating category/low-end of the 'BBB' category. The share of its aftermarket business, less volatile and cyclical than sales to original equipment manufacturers (OEMs), is smaller than tyre manufacturers such as Michelin and Continental. Faurecia's portfolio has fewer products with higher added value and substantial growth potential than other leading and innovative suppliers including Bosch, Continental, Delphi and Valeo. However, similar to other large and global suppliers, it has a broad and diversified exposure to the large international auto manufacturers. With an EBIT margin around 5%, profitability is lower than that of investment grade-rated peers, such as Continental (BBB+, 10% EBIT margin), BorgWarner (BBB+, 13.5%) and Delphi (BBB, 13.5%) and 'BB+'-rated Tenneco (7.5%). Faurecia's FCF is at the low-end of Fitch's portfolio of auto suppliers. Adjusted net leverage is around 1.5x, lower than Tenneco and improving but still higher than investment-grade peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case are listed below. - Revenue growth in mid-single digits in 2017-2019. Fitch will continue to use total sales, including monoliths, in its analysis in 2017 to maintain consistency between historical figures and projections. We deem 2017 a transition year and will move to value-added sales as soon as the group reports its full financial statements based on this accounting standard. - Operating margins to increase to more than 6% of total sales by 2019. - Restructuring cash outflows to increase to nearly EUR100m in 2017 and decline to about EUR50m per year in the years after. - Moderate cash outflow from working capital in 2017-2019. - Capex, including capitalised development costs, to increase gradually to about EUR1.1 billion per year. - Dividend payout ratio of around 25%. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - Operating margins above 6%. - FCF margins around 2%. - FFO adjusted net leverage of 1.5x or below. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: - Operating margins below 4%. - FCF margins below 1%. - FFO adjusted net leverage above 2.5x at any point. LIQUIDITY Sound Liquidity: Liquidity is supported by EUR1.2billion of readily available cash according to Fitch's adjustments for minimum operational cash of about EUR0.4billion and total committed and unutilised credit lines maturing in June 2021 were EUR1.2 billion at end-2016, largely covering short-term debt of EUR0.3 billion at end-2016. The group's financial flexibility and liquidity were further strengthened by the issuance of EUR700 million in senior unsecured notes in April 2016 and maturing in June 2023. This issue refinanced the anticipated repayment of EUR490 million of notes maturing in December 2016 and carrying a coupon of 9.375%. FULL LIST OF RATING ACTIONS Contact: Principal Analyst Aurelien Jacquot Associate Director +33 1 4429 9137 Supervisory Analyst Emmanuel Bulle Senior Director +34 93 323 8411 Fitch Ratings Espana S.A.U. Av. Diagonal 601 08028 Barcelona Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Summary of Financial Statement Adjustments - Readily Available Cash: As of December 2016, Fitch considered that EUR0.4 billion of cash, or around 2% of net sales, is needed for day-to-day operational activities, therefore not readily available for debt repayment. - Leases: Fitch has adjusted the debt by adding 8x of yearly operating lease expense. - Factoring: Fitch has adjusted leverage calculations for Faurecia by reintegrating EUR1 billion of off-balance-sheet non-recourse receivables factoring into the company-reported gross debt as at year-end 2016. The EUR0.2 billion factoring increase during the year has been moved from working-capital inflow to cash flow from financing activities. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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