Le duo Delbos-Senard face aux agences de notation

Serving another type of client
As expected, the major rating agencies downgraded Renault's credit rating this week and posted lower price targets. Renault's management obviously prefers to play the truth speech that will mobilize the teams rather than tell the markets and analysts what they would like to hear.
On Tuesday, the rating agency Moody's downgraded its long-term credit rating on Renault from Baa3 to Ba1, with a stable outlook. 
It sanctions the group's poor performance for 2019 announced the previous week: in the red in 2019, for the first time since 2009, Renault, which saw its sales and profitability fall, did not want to be reassuring for 2020 by envisaging a further drop in its profitability. This is the reason for the downgrading of Moody's rating, which indicates :
"According to the company's published forecasts for 2020, which anticipate a further decline in operating margin, and the weak market environment, we do not expect Renault to be able to return to correct operating margin levels in the medium term".
The S&P agency quickly followed suit by explaining itself:
"While we consider that Renault has maintained good financial flexibility thanks to comfortable cash reserves, a number of operational challenges could still weigh on the generation of available cash over the next 18 to 24 months".
On Wednesday, for these reasons, S&P Global Ratings placed Renault's long-term credit rating (BBB-) on watch with negative implications. At the current time, the rating agency expects the potential downgrade to be limited to one level. Its decision will be made by the end of the month when Renault's recovery plan will be finalized and communicated.
As for the valuation of the Renault share, it should be noted that the share, which was still trading at 58 euros on September 13, was only worth 31 euros on Friday. Jefferies has lowered its target for the stock: "The broker is now aiming for 28 euros (compared to 38 euros previously), with an opinion maintained at Underperformance".
None of this will come as a surprise to Renault's management, which wanted to use a language of truth that broke with what the analysts had heard during the very unconvincing presentation of the half-year results in July. There is no longer any question today of pretending to be in line with the 2017-2022 plan called "Drive the Future" that T. Bolloré was still quoting in July and whose remains are still on the group's website.
It should be remembered that the plan aimed for strong growth by 2022, i.e. 5 million vehicles sold, 70 billion euros in sales (compared with barely 51.2 billion in 2016), a minimum operating margin of 7% (6.4% in 2016) and a positive cash flow every year.
On the contrary, since the departure of T. Bolloré, C. Delbos has wished to speak the truth by stating that the targeted volumes will not be reached either in Europe or elsewhere, that they have often only been reached in 2019 by using commercial "anabolics", which have had a negative impact on profitability, and that, in Europe in particular, it is therefore necessary to adjust capacity to the volumes that can be reasonably expected to be reached in order to avoid this dynamic.
Since neither this "resizing", nor the renewal of the necessary products, nor the relaunch of the Alliance will be able to produce their effects very quickly, while investment in EVs, hybrids and PHEVs will continue to be necessary, it would be pointless to hope that the results of 2020 will be significantly improved compared to those observed in the second half of 2019.
The choice made by the Delbos-Senard duo - whose cohesion is reminiscent of that of the Tavares-Gallois duo - is to take the risk of being subjected to these assessments, which the rating agencies are not very keen on, in order to be able to structure a recovery plan that is both understood and mobilising. Their reasoning is that this internal dimension is fundamentally more important than share price and debt rating. Since Renault is not currently short on cash, even a downgrade of its credit rating should not result in significant additional costs. As for the share price, everything indicates that setting targets for it would be pointless. The only problem could be RCI and its profitability.
Indeed, everyone has noted that, faced with Nissan's profitability problems, Renault can no longer count on its "captive" financial subsidiary to make up for the shortfall in operating margin generated by the "automotive" part of the business. Thus, in 2018, RCI accounted for only one-third of the group's operating margin of 3.6 billion euros. This seems to be a relatively standard ratio. In 2019, "sales financing" accounts for 46% of the margin.
The increase in the cost of access to the monetary resources that RCI needs to finance sales and inventories for professionals should not be allowed to undermine this profitability and deprive Renault of this source of profitability, the importance of which is well known in the low phases of cycles.
Indeed, everyone remembers that the most serious crises experienced by carmakers go through these initial signals before harmful dynamics are set in motion, forcing the captive to disassociate itself from the automotive group to which it was attached in order to preserve its ability to offer financing.
Chrysler and then GM had gone through this barely 15 years ago and the "new GM" was only able to fully reintegrate GMAC into its scope by buying back its captive from Ally in 2012. The French State had also had to come to the rescue of PSA Finance by guaranteeing its loans to avoid such a descent into hell in 2012.
Like everyone in the automotive industry, Delbosand Senard know these stories and are betting that, like them, analysts will not confuse the situation in which Renault finds itself in 2020 with that of Chrysler and GM between 2006 and 2009 or that of PSA in 2012. Renault certainly needs to break with the policy of burying its head in the sand and take the bull by the horns by giving itself a credible recovery and development plan over the next three months in conjunction with Nissan and Mitsubishi. But Renault is not on the verge of bankruptcy and, with the Alliance, Dacia and VE, it has very solid levers for recovery at international level.
Provided that the plan presented last May can benefit from this language of truth to convince internally, Renault executives are betting that the agencies will be able to recognize it and revise their judgments.
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Translated with www.DeepL.com/Translator, corrections by Géry Deffontaines

La chronique de Bernard Jullien est aussi sur www.autoactu.com.

The weekly column by Bernard Jullien is also on www.autoactu.com.

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