Carmakers credit crunch

30 March 2020

Major carmakers are succumbing to credit rating downgrades amidst the coronavirus (COVID-19) pandemic. BMW, Ford and Toyota have all had their ratings lowered by Moody’s.

Other major European, US and Japanese carmakers’ ratings are also under review. These companies include Daimler, General Motors, Jaguar Land Rover (JLR), PSA Group, Renault, Volkswagen (VW), Volvo and McLaren. Fiat Chrysler Automobiles’ (FCA) rating is also being monitored, with a less certain direction.

′The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock,’ Moody’s said. The credit rating agency reasoned that the automobile sector has been one of the most significantly affected by the recent turmoil due to its sensitivity to consumer demand and sentiment.

′The weaknesses in the companies’ credit profiles, including their exposure to final consumer demand for light vehicles, have left them vulnerable to shifts in market sentiment in these unprecedented operating conditions,’ it asserted.

Falling credit

Moody’s dropped BMW from an A1 to an A2 credit rating. They explained the manufacturer was in a weak position in the A1 category before the COVID-19 outbreak began. Based on the carmaker’s 2019 financial report, Moody’s estimated BMW’s adjusted EBITA margin was roughly 5.8%, with an adjusted free cash flow of roughly €0.6 billion. This compares with an EBITA margin of 6.6% and an adjusted free cash flow of €-0.5 billion in 2018. BMW has warned that both its profit and sales would fall significantly this year given the disruption in production and supply chains. Meanwhile, Ford was lowered to Ba2 ranking, further into the ′junk’ category.

Toyota was downgraded to A1 from Aa3, and Honda fell to A3 from A2. Nissan went further down the rating scale to Baa3 from Baa1. Given the ongoing managerial mess surrounding the ousted former chairman Carlos Ghosn and decade-low profits, Nissan still holds the lowest credit rating of Japan’s top three carmakers.

The future of FCA’s rating, however, remains uncertain. On one hand, the entire automobile industry is in a particularly precarious position, with COVID-19 stalling supply chains and stifling demand. But referring specifically to FCA, Moody’s believes their proposed merger with PSA Group will create a larger, more diversified company. A combined rating of both companies should exceed the standalone rating of FCA on its own.

Coming months

Moody’s believes that the demand for new vehicles will be ′reduced meaningfully’ over the upcoming months, particularly in the European, Middle Eastern, and African (EMEA) and North American markets. This is expected to continue until the early summer at the latest. The ratings agency currently assumes that global demand will shrink by 14% in 2020, and could be down roughly 30% in the second quarter. ′Accelerating incidence of the coronavirus across the US and EMEA could lead to even more extended production shutdowns and a much-delayed recovery of unit sales,’ Moody’s said.

Alongside the impact of COVID-19, Moody’s also recognises the continuing challenges the automotive industry faces. Heightened environmental standards, stricter emissions regulations and advancing vehicle capabilities will require sizeable investments over the coming years.