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S&P Slashes Renault Rating Citing Deteriorating Finances

Will This Lead To Finance Subsidiary, Volvo Truck Stake Sales?
VW Golf Sales At €9,999 Hurting Competition.

Investors are divided about Renault’s prospects and what it should do to stave off financial crisis, but Standard & Poors is convinced the future looks bleak.

S&P, the U.S. credit rating agency, cut Renault to what it calls “speculative” grade, mainly because auto demand in Europe is likely to remain low through 2010, where Renault sells 60 per cent of its cars.

“Our downgrade of Renault reflects our view that auto demand is likely to remain very low in Europe in 2010, due to the weak economic environment and the payback effect of the incentive schemes that several European countries have adopted to date in 2009,” said S&P analyst Barbara Castellano. “We believe these factors will continue to penalise Renault’s profitability.

“We believe that the company’s financial metrics are likely to deteriorate further and will probably not return in the medium term to levels we consider consistent with the previous rating,” she said.

The French state owns 15 per cent of Renault.

Nomura International sees a silver lining in this rating cut, because it will force Renault management to take a decision it is reluctant to embrace – the sale of assets like a stake in its financing subsidiary, and its holding in Volvo Trucks.

Sell RCI, Volvo Truck Stakes
Nomura analyst Jeremie Papin said Renault should sell at least 50 per cent of RCI, Renault’s financial services subsidiary, and its holding in Volvo Trucks.

“We believe Renault is also very likely to sell its holding in Volvo. With Renault management having made several references to its stake in Volvo as a potential source of cash, we believe it would be well advised to cash in on the €1.9 billion value of its Volvo holding and further reduce its net debt,” Papin said.

Citigroup Global Markets analyst John Lawson thinks the first option makes no sense, but selling Volvo is more likely.

RCI strategic
“We think a sale both unlikely, and undesirable, even if financing costs materially cut (the finance subsidiary) returns. We feel it highly likely that Renault management regards RCI as a strategic asset. It….. is not only a valuable source of profit, and strategically important in supporting Renault (and alliance partner Nissan in Europe) sales. Selling Volvo shares would be a much more likely resort for cash, though these too protect some French manufacturing interest,” Lawson said.

Bernstein Research analyst Max Warburton recommends investors buy Renault shares, mainly because of its link with Nissan which promises big leverage on a likely revival in U.S. sales, but he is not overwhelmed by Renault’s prospects in Europe.

“Renault suffers from too narrow a product portfolio, based too heavily on carryover platforms. Competitors like VW and Peugeot-Citroen are offering a far greater array of vehicles and more segmentation – a strategy that adds costs, but also volume and pricing opportunity,” Bernstein said, after attending a Renault investor meeting linked to the launch of the new Scenic.

Warburton said VW competition was becoming a problem for Renault, and others.

Will VW price assault hurt its residuals?
“Renault management said VW was selling its new Golf at just €9,999 in some markets to retail customers – a devastatingly low price that Renault won’t match. Amazingly for both Renault and this analyst – there are as yet no signs that this strategy is damaging VW’s relative residuals and brand. Where does VW’s market share assault stop?” Warburton said.

S&P’s Castellano did have some warmer thoughts about Renault.

“Once auto demand in Europe and the rest of the world returns to levels consistent with the historical trends, we expect that Renault should be in a position to take advantage of this situation and restore a strong financial profile,” she said.

No word though on when that might happen.

Neil Winton – July 1, 2009

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