Automakers withstand downgrade storms – for now

Moody's Investors Service has been downgrading auto debt in light of the COVID-19 pandemic, but the industry has strengthened its balance sheets since the previous recession, and less than half of companies saw their ratings cut.

The agency cut ratings on nine of the 22 companies it covers, citing the production and demand effects of the coronavirus on top of the industry's existing profit challenges.

Moody's projects that global light- vehicle sales will slump at least 20 percent in 2020 and take several years to return to 2019 levels. Over the past three months, total debt downgraded was about $130 billion, excluding the debt issued by captive finance arms.

Automakers that were downgraded included highly rated companies as well as those that are restructruring.

Ford's rating was cut to Ba2 in March as a result of the pandemic. That followed a cut in September as the company struggled in China and continued a massive restructuring effort.

BMW's financial performance was already declining before the coronavirus pandemic. The company's earnings before interest, taxes, depreciation and amortization margin fell steadily to 5.8 percent in 2019, from 9 percent three years earlier, Moody's said. European emissions rules weigh heavily on the company's prospects.

Renault's profitability and free cash flow generation have declined significantly since 2017, leading Moody's to downgrade its long-term rating in February. Lower vehicle sales, unfavorable mix and rising costs all hurt the company's performance, as did a "materially declining contribution from its alliance partner Nissan."

Toyota Motor Corp. had its outlook cut to negative in January as it faced increasing environmental standards and large investments for autonomous and electric vehicles. Its rating was lowered in March because of the coronavirus, "despite Toyota's long history of industry leading financial metrics," Moody's said.

Honda Motor Co.'s profitability was already pressured by "increasing competition in the medium-sized and small car segments," in which the company long thrived. Moody's said the coronavirus outbreak will hurt demand in crucial emerging markets.

Nissan's problems in North America led to a ratings downgrade in January.

The pandemic and ensuing slump as Nissan attempts to refresh old models, rebuild its brand strength and rejuvenate its fractured relationship with Renault led to a second cut in March.

Beijing Automotive's ratings reflect expectations of "a high level of extraordinary support from Beijing's municipal government, and ultimately the Government of China," Moody's said. But with the automaker facing high leverage and sluggish demand in China, Moody's lowered the rating by one notch.

McLaren's rating was lowered to deep speculative-grade territory. Its liquidity is "rapidly eroding," and Moody's said it believed additional funding was needed and uncertain. Tata Motors' ratings were downgraded as the coronavirus amplified existing struggles, such as falling sales in key markets leading to negative free cash flow.

Most companies, however, are in better shape than a decade ago, Moody's said. One notable example is General Motors.

It "took profound steps to strengthen operations" as it invested in electrification and autonomous driving. GM exited low-return businesses to concentrate on its "exceptionally strong" truck franchise and China.