Fitch Affirms Faurecia at 'BB-'; Outlook Stable
The ratings reflect Faurecia's business profile, which we consider well positioned in the 'BB' category. However, the ratings also incorporate weak financial ratios, which drag the overall credit profile to the low end of the 'BB' rating category.
Revenue growth and operating margin strengthened in 2014 and we expect further improvement in 2015 and 2016. However, cash generation and other key credit metrics remain weak for the rating category. In particular, we expect free cash flow (FCF) to increase to only about 1% in 2015 and 2016, from negative 1.1% in 2014. Faurecia's financial structure was also commensurate with the 'B' category at end-2014 although we project a gradual decrease of funds from operations (FFO) adjusted net leverage to just above 2x at end-2015, from 3.1x at end-2014. This should provide more headroom to the ratings.
KEY RATING DRIVERS
Improving Profitability, Weak FCF
The operating margin recovered in 2014 and we expect it to improve further to 4.3% in 2015 although this remains relatively weak for the group's business. We project the operating margin will increase to about 5% by 2017 which would be more in line with close peers and the 'BB' rating category.
Cash generation is also improving to levels more commensurate with the 'BB' category with the funds from operations (FFO) margin increasing to more than 5.0% in 2015, from 3.9% in 2014 and 2.9% in 2013. The FCF margin remains weak for the rating (negative 1.1% in 2014) after adjusting for derecognised trade receivables that boosted working capital and, in turn cash from operations (CFO) and FCF, but which Fitch considers as a change in debt. However, we project the FCF margin will become positive in 2015 and increase gradually to about 1.5% in 2017.
Weak Financial Structure
Faurecia's financial structure was commensurate with the 'B' category at end-2014, including gross and net leverage at 3.8x and 3.1x, respectively, and CFO on debt around 20%. However, positive FCF and higher FFO will strengthen the financial structure as we expect net leverage to decline to 2.2x at end-2015 and less than 2.0x at end-2016 and CFO on debt to increase to more than 40% at end-2016. Fitch adjusts reported debt for derecognised trade receivables (EUR742m at end-2014) and operating leases (EUR488m).
Leading Market Positions
Faurecia's ratings are supported by its diversification, size and leading market positions as the seventh 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 concentration among 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.
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.
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 with its parent Peugeot SA (51.2% stake and 67.3% voting rights). We also deem the legal, operational and strategic ties between the two entities weak enough to rate Faurecia on a standalone basis.
Limited Effect from Volkswagen Scandal
We do not foresee any direct and immediate impact from the Volkswagen emission test manipulations on Faurecia. However, longer-term uncertainty remains about the potential consequences for carmakers and suppliers of a potential shift from diesel to gasoline engines, hybrid and electric vehicles. Nonetheless, the extent and time frame of these effects on the broad auto industry is unclear at this stage. In addition, Faurecia's sales to Volkswagen related to diesel vehicles in the US are not material in view of Faurecia's total size and we believe that business at risk from potential lower sales to Volkswagen could be compensated by higher revenue from other customers.
Fitch's key assumptions within the rating case for Faurecia include:
- Revenues to increase by more than 11% in 2015 and approximately 4-5% in 2016 and 2017;
- Operating margins to trend toward 5% by 2017;
- Restructuring cash outflows to remain around EUR70m each year over 2015-2017;
- Capex of around 4.4% of revenue over 2015-2017;
- Dividend pay-out ratio of around 20%;
-Conversion of the convertible bonds in 2016.
Negative: Future developments that could, individually or collectively, lead to a downgrade include:
- Inability to sustain the improvement in profitability and cash generation, leading in particular to operating margins remaining below 3%
- FCF margins remaining below 1%
- Inability to sustain the decrease in leverage, leading in particular to FFO adjusted net leverage remaining above 3x (2014: 3.1x, 2015E: 2.2x, 2016E: 1.6x)
- Deteriorating liquidity, notably through difficult or expensive refinancing
Positive: Future developments that could, individually or collectively, lead to positive rating action include:
- Sustained increase of operating margins above 5% (2014: 3.6%, 2015E: 4.3%, 2016E: 4.6%)
- Sustained increase of FCF margins above 2% (2014: -1.1%, 2015E: 0.8%, 2016E: 1.0%)
Faurecia's liquidity is sound, supported by EUR630m of readily available cash according to Fitch's adjustments for minimum operational cash of about EUR0.4bn at end-2014. This covers short-term debt of EUR0.5bn at end-June 2015. Total committed and unutilised credit lines were EUR1.4bn at end-June 2015.