A recent Standard & Poor’s report claims that US based suppliers and automakers are still facing two more difficult years.
SupplierBusiness told just-auto that the report is based on the rating’s agency’s current set of North American rating’s outlooks.
Almost all rated North American automakers and auto suppliers have negative rating outlooks or are on CreditWatch with negative implications. Only three companies have investment-grade ratings: two (Magna and Johnson Controls) are on CreditWatch with negative implications, and one (BorgWarner) has a negative outlook.
The cause of the downturn in ratings, according to Standard and Poor’s, is that the majority of rated companies in the auto sector entered the current industry downturn with aggressive or highly leveraged financial risk profiles. One positive factor was that most of these companies entered the downturn with relatively benign debt maturity profiles thanks to a wave of refinancing prior to mid-2007; however, this factor has not prevented an increase in defaults. More defaults are probable, according to the firm, with six companies with ‘CCC‘ category ratings.
Global Downturn And Industry Changes Diminish Diversification Benefits For Now
Through much of 2008, stable auto sales in Europe and growth in Latin America and many emerging markets offset weak sales in North America. However, this is no longer the case, and is not helped by the transformation occurring in the automotive industry, with more and more suppliers seeing diversification as necessary to the survival of their business. Events that were once considered unlikely, such as large-scale consolidations, are taking place, in addition to two major automaker bankruptcies. The bailouts given by The U.S. government will ensure that the industry will stay in politicians’ sights in North America for many years to come; the political capital invested adding to the fact that the auto industry is integral to economy. Although government guarantees or direct funds are providing much-needed liquidity support in some cases, they will not in our view solve the industry’s structural problems, including overcapacity and tough competition.
Nevertheless, geographic and product diversification remain long-term positive attributes. It is a salient point that economies are under pressure, and even geographically diversified companies are generally reporting weak results. But two of the three remaining investment-grade-rated companies (Johnson Controls and BorgWarner) have strong customer or end-market diversification, which has helped them weather the downturn – even if it has not kept their ratings from being lowered. This is not solely a U.S. issue, with Bosch reducing its reliance on automotive sales over the years, from 71.2% of total sales in 2000 to 59% in 2008.
Nethertheless, Standard and Poor’s cited “the broad global downturn in light-vehicle sales, caused by the severe economic downturn and the resulting drop in consumer spending.” As the main reasons for its assessment of the U.S. automaker and supplier sectors.
This article was supplied to just-auto by SupplierBusiness, an IHS Global Insight company.