Credit Rating Downgrades in the Car Industry, as Production Restarts

At the end of last year we reviewed Moody’s decision to downgrade Ford to ‘junk’ status here, but in the current crisis it is not surprising to hear that the wider industry is coming under increased pressure. With that pressure, naturally, comes to the threat of being downgraded by the leading credit rating agencies. As the downgrade wave turns its attention to the automotive sector, we will review these credit actions and also how the industry is attempting to recover.

Although Ford’s downgrade came before the onset of the COVID-19 pandemic, a number of other automotive manufacturers were in a precarious position with regards to their credit status. Like a number of other prospective so-called ‘fallen angels’ – a term used to describe the bonds of an entity that were once investment-grade but that have now fallen past that category – there are, and were a number of very recognisable companies that are teetering on the edge of investment grade. Credit analysts have been warning of the impact that the pandemic could have on the industry since the pandemic started affecting large portions of the globe, with S&P warning that ‘we expect a material decline of light vehicle demand globally… we expect this decline will be particularly severe in the second quarter…’. This is almost common sense of course, but the reality of the picture is slowly unfolding. Recently, S&P downgraded Renault to ‘junk’ status, while it cut its outlook on Peugeot’s owner PSA to negative, with the car giant teetering on the edge of investment-grade. Moody’s placed Indian automotive manufacturer Tata Motors on review for a downgrade, threatening its investment-grade status, whilst in South Korea Fitch lowered Hyundai and Kia’s outlook to negative, leaving it hovering over the investment-grade boundary; S&P and Moody’s have warned that both companies are on a negative observation, with reductions in their outlooks (at the very least) being particularly likely. While this negative observational period may be linked to a broader negative period for the region as a whole, the underlying fragility of the automotive sector is clear to see, with car loan-backed securities making the news for failing to obtain ratings. Only recently were BMW, Nissan, Honda, and Toyota downgraded by Moody’s, which was adjoined to negative reviews being placed on General Motors, Daimler, Jaguar Land Rover, Volkswagen, Volvo, and McLaren.

As part of the industry’s response to the pandemic, manufacturers and suppliers had closed their plants. However, as some parts of the world tentatively attempt to re-open their societies, a number of automotive manufacturers are attempting to restart their operations. Daimler and Suzuki have announced plans to restart plants in Hungary, whilst Audi and Hyundai have announced plans to do the same. Renault is restarting its plant in Portugal, whilst Toyota has announced its plans to resume its operations at its plant in France from April the 22^nd. Volvo plans to restart next Monday, and Hyundai has already restarted its Polish plant. Even more surprisingly is Ferrari, which has announced its plans to reopen its Maranello facility shortly, despite being within the hotbed of Northern Italy. However, it does appear that sites in the UK and in the US are remaining closed, with Jaguar Land Rover and Ford declaring that they have no plans to reopen anytime soon.

Time will tell whether these automotive giants have reacted too soon, although one would trust that as many precautions as can be taken will be. However, the financial pressure that the industry is constantly under has been magnified many times over in this current crisis, and the fear is that the rush to restart is based majoritively on that premise. If so, an increase in the spread of the infection because of such moves will likely be negatively received, particularly as car travel is severely restricted at the moment, which in turn means car purchases are equally low. Yet, if the restarting of the industry produces few problems, it is likely that it will be seen as the marker for manufacturing processes to begin to return to usual rates.

Keywords – COVID-19, business, automotive, manufacturing, @finregmatters