Renault: Renault’s credit rating about to be raised by Moody’s

(BFM Bourse) – The rating agency has raised the outlook on the group’s “Ba1” credit rating to “positive”, which means that it could raise it in the next twelve to eighteen months.

As we have written on several occasions, Renault has clearly returned to the odor of sanctity among investors in 2024. Long on the scrapheap, the automobile group’s shares have gained more than 31% since the start of the year, the second largest increase in the CAC 40 behind Safran (+34.7%).

This progress on the stock market is linked to the improvement of the group’s fundamentals and its prospects. In the opinion of analysts, Renault’s financial renaissance is enough to attract the attention of rating agencies.

Renault is currently rated by two major agencies, S&P (at “BB+”) and Moody’s (at “Ba1”). These two grades correspond, in the nomenclature of each agency, to the last notch of the speculative category, just before the “investment grade” category, that of good students, and therefore synonymous with lower financing costs.

However, the group has made it a priority to return its credit rating to this “investment grade” category.

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Successful launches

A first important step was taken by Moody’s on Thursday evening. The American agency raised the outlook for Renault’s “Ba1” rating from “stable” to “positive”.

“This positive outlook indicates that a potential reclassification to investment grade is possible in the next 12 to 18 months, provided the company demonstrates that credit metrics can be further improved in a more competitive market environment,” Moody’s explains.

The agency explains that, for this, Renault will have to maintain its adjusted and restated operating margin (Ebita), also excluding the contribution of Nissan’s results, at a rate at least equal to that reached in 2023, i.e. 4.4% ( after 3.3% in 2022). Renault will also have to reduce its debt leverage as Moody’s calculates it to 2.75 compared to 2.9 in 2023 (and 4.3 in 2022), publish positive cash generation, and “preserve its good liquidity profile”.

Another point, more strategic: reducing the group’s rating to investment grade requires that “the company catches up with its competitors in terms of penetration of battery electric vehicles”, adds Moody’s. “The commercial success of the four battery electric models (Renault Scenic, Renault 5, Dacia Spring and Alpine A290) which will be launched this year will play a determining role in this regard,” adds the agency.

Improve shareholder return

Moody’s expects “market conditions (automotive) to become more difficult this year, with an intensified competitive environment characterized by increasing pressure on prices.”

However, Renault has certain assets in hand. “The company’s product offensive, with the launch of ten models this year (…), if commercially successful, coupled with further advances in cost structure and manufacturing efficiency organization, is expected to support revenues and margins in the future, despite a more difficult market environment,” explains the agency.

As Berenberg wrote in a recent note, the increase in the credit rating could constitute a catalyst for Renault shares. Such a decision would allow the group to have more latitude to increase its return to shareholders, that is to say the dividend (or share buybacks).

For 2023, Renault plans to pay a coupon of 1.85 euros per share, which represents a distribution rate of 17.5% while the company is targeting 35% in the medium term.

Julien Marion – ©2024 BFM Bourse