OREANDA-NEWS. Fitch Ratings has affirmed Renault SA's (Renault) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the Long-term IDR is Stable.

The ratings reflect Renault's solid business profile, including ongoing and successful diversification outside Europe and strengthened image and product portfolio. They also reflect the resilience of Renault's profitability and underlying cash generation in a difficult and adverse environment, notably for volume manufacturers. The ratings are supported by Renault's significantly improved liquidity and balance sheet. The group's sound liquidity and healthy financial structure provide it with more flexibility to go through the next cyclical downturn or face potential financial challenges without significantly impairing its main credit ratios, which is a key characteristic of an investment grade auto manufacturer.

We do not foresee any direct and immediate impact from the Volkswagen AG (BBB+/Negative) emission test manipulations on Renault. Longer term, uncertainty remains about the possible consequences for carmakers of a potential shift from diesel to gasoline engines, hybrid and electric vehicles. However, the extent and time frame of these effects on the broad auto industry is unclear at this stage.

KEY RATING DRIVERS
Resilient Under Pressure
The rating reflects Renault's resilient profitability and cash generation in a difficult environment, especially for volume manufacturers. Group operating margins increased to 3.9% in 2014 and Fitch expects further improvement to just above 5.0% by end-2016, including a strengthening of core automotive operations. Renault's restructuring measures have streamlined its cost structure, lowered its breakeven point and made it more resistant to a possible downturn. In particular, we expect adverse conditions in Russia and Latin America in 2015, although this should be offset by an improving environment in Europe.

Strong Credit Metrics
Net financial debt has fallen substantially since 2009 as a result of positive free cash flow (FCF) and asset sales, while earnings and funds from operations (FFO) rebounded in the same period. Adjusted net leverage has declined continuously to just above zero at end-2015 from 5.6x at end-2009, according to our projections. This provides the group with greater flexibility for the sector's next cyclical downturn.

Weak but Improving Mix
Renault's sales retain a bias towards Europe, in particular to weaker southern markets such as Spain, Italy and France, where the eurozone debt crisis has had the most impact on new car sales. However, ongoing and successful diversification has led to a growing share of sales outside Europe. Renault also derives the majority of its revenue from the less profitable small- and medium-sized car segments, where competition is fiercest and price pressure is strongest.

Entry-Level Models Success
The success of the growing entry range is pivotal in compensating for the sales declines of the core Renault models, and also favours geographical diversification. In addition, the profitability of the entry range is higher than the automotive average and therefore bolsters group operating profit.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Renault include:
-Industrial operations revenue up by more than 7% in 2015, and by a further 5%-6% in 2016-2017.
-Auto operating margin increasing to between 3%-4% in 2015-2016 and towards 5% in 2017;
-Capex to increase moderately to about EUR3bn.
-Dividend payment to increase gradually to between EUR650m-700m by 2017.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to positive rating action include
- Further enhancing diversification outside of Europe.
- Sustainable improvement in profitability, in particular group operating margin above 5% (2014: 3.9%, 2015E: 4.7%, 2016E: 5.3%) and auto operating margin above 4% (2014: 2.2%, 2015E: 3.1%, 2016E: 3.8%).
- Sustainable improvement in financial metrics, including net adjusted leverage below 0.5x (2014: 0.3x, 2015E: 0.1x, 2016E: -0.1x) and cash from operations (CFO) on total adjusted debt above 50% (2014: 33%, 2015E: 39%, 2016E: 51%).
- Successful and profitable introduction of a premium model range.

Future developments that may, individually or collectively, lead to negative rating action include
- Deteriorating profitability, including auto operating margin sustained below 1.5%, group operating margin below 3.0% and FCF margin below 1.0%.
- Deterioration of key credit metrics, including net adjusted leverage above 1.5x and CFO/adjusted debt below 35%.

LIQUIDITY
Healthy Liquidity
Liquidity is sound, including EUR11.1bn of readily available cash and liquid investments for industrial operations at end-2014, according to Fitch's adjustments for minimum operational cash of about EUR1.4bn and not readily available financial assets. In addition, total committed credit lines of EUR7.4bn, including EUR4.1bn at RCI Banque, were undrawn at end-June 2015.