OREANDA-NEWS. Fitch Ratings has upgraded Faurecia S.A.'s Long-term Issuer Default Rating (IDR) and senior unsecured debt to 'BB' from 'BB-'. The Outlook on the Long-term IDR is Stable.

The upgrade reflects Fitch's expectations of stronger credit metrics in 2016 and beyond, following improved results in 2015 and the disposal of about 95% of the automotive exteriors (FAE) business. In particular, free cash flow (FCF) became positive in 2015 and funds from operations (FFO) adjusted net leverage declined to 2x at end-2015 (or 1.4x pro-forma of the FAE sale proceeds to be received in 2016) from 3.1x at end-2014.

We project that Faurecia's FCF margin will remain weak for the rating in the next 18-24 months. However, this is offset by the group's lower indebtedness and leverage. Furthermore, we believe that FCF will remain at low levels because of sustained high investment and the resumption of dividends, which could be reduced or cut, respectively, in case of financial stress, rather than weak underlying profitability.

We believe that part of the FAE proceeds will be used in acquisitions over 2016-2018, but we have not factored any specific purchase in the next couple of years in our rating case due to lack of public guidance and visibility on details. However, we believe that the weight of acquisitions on the deleveraging path will be limited and have no direct effect on the rating if they are bolt-on transactions and additional debt does not push the leverage outside our negative rating guidelines.

KEY RATING DRIVERS
Stronger Financial Structure
Fitch expects FFO adjusted net leverage to decline further to 1.4x at end-2016, once cash proceeds from the FAE business have been received. Faurecia's financial structure is substantially improved, with FFO adjusted net leverage at 2x, and cash from operations (CFO) on debt around 36% at end-2015, from 3.1x and 20%, respectively at end-2014. We believe that a modest increase in capex and dividends and potential small acquisitions with part of the FAE proceeds will limit the improvement in FCF generation and leverage reduction in 2017-2018 however.

Weak Albeit Improving FCF
We expect a further progression in operating margin to 5% in 2016 from 4.4% in 2015, more in line with close peers and the rating. Cash generation is also improving to levels more commensurate with the 'BB' category with the FFO margin increasing to 5.5% in 2015, from 3.8% in 2014. The FCF margin became positive in 2015, but remains weak for the rating after adjusting for derecognised trade receivables that boosted working capital and, in turn CFO and FCF. We project that the FCF margin will increase gradually to about 1.5% by 2018.

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.

Sound Diversification
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.

Business Refocus
We believe that the FAE disposal is an illustration of the group's aim to gradually refocus its business. We expect Faurecia to use some of the FAE proceeds to acquire businesses in faster-growing segments with better margins and to accelerate the vertical integration of its interior business. A successful strengthening in more profitable and higher added-value businesses will be crucial to support further positive rating action.

Weak Linkage with PSA
We applied our Parent and Subsidiary Rating Linkage methodology and assessed that Faurecia has a slightly weaker credit profile than its parent PSA (46.6% stake and 63.2% voting rights). We also deem the legal, operational and strategic ties between the two entities weak enough to rate Faurecia on a standalone basis.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Faurecia include:
- Revenue to increase by mid-single digits in 2016-2018.
- Operating margins to increase to 5.1%-5.5% in 2016-2018.
- Restructuring cash outflows to remain around EUR75m per year over 2016-2018.
- Capex of around 4.8%-5.0% of revenue.
- Dividend pay-out ratio of around 20%-25%.
- Proceeds of the FAE disposal to be received in 2016.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include, all on a sustained basis:
- Operating margins above 6%.
- FCF margins around 2%.
- FFO adjusted net leverage of 1.5x or below.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Operating margins below 4% on a sustained basis.
- FCF margins below 1% on a sustained basis.
- FFO adjusted net leverage above 2.5x at any point.

LIQUIDITY
Sound Liquidity
Liquidity is supported by EUR0.5bn of readily available cash after Fitch's adjustments for minimum operational cash of about EUR0.4bn, and total committed and unutilised credit lines were EUR1.2bn at end-2015, largely covering short-term debt of EUR0.9bn at end-2015. Subsequently, we expect the group's issuance of EUR700m in senior unsecured notes in March 2016 maturing in 2023, to redeem EUR490m notes due in December 2016.

All existing upstream guarantees on Faurecia's other instruments will lapse as a result of the make-whole redemption of the 2016 notes.

Summary of Financial Statement Adjustments
- Readily Available Cash: As at December 2015, Fitch considered that EUR395m of cash, or around 2% of net sales, is needed for day-to-day operational activities, therefore not readily available for debt repayment.
- Leases: Fitch has adjusted the debt by adding 8x of yearly operating lease expense related to long term assets of EUR54m for the year 2015.
- Factoring: Fitch has adjusted leverage calculations for Faurecia by reintegrating EUR840m of off-balance-sheet non-recourse receivables factoring into the company-reported gross debt as at year-end 2015. The EUR92m of factoring increase during the year has been moved from working capital inflow to cash flow from financing activities.