The overall outlook for credit ratings of European automotive manufacturers has shifted from stable to negative, in Moody’s Investors Service’s latest industry outlook for the sector.
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Moody’s outlook report, published on Tuesday (28 February), lowered the motor industry outlook having examined the principal trends and credit drivers for the European automotive manufacturing key businesses.
The investor service rated seven manufacturers – BMW, DaimlerChysler, Fiat, Renault, Peugeot, Volkswagen and Volvo – which retained a solidly positioned average universe of ‘Baa1’ at the end of 2005, unchanged from end of 2004. Therefore, rating revisions over the past year were confined to changes in outlook.
The outlook on DaimlerChrysler’s A3 rating with the investors service was changed from stable to negative, with all other manufacturers ratings at stable. Peugeot’s A3 rating from positive to stable while Volkswagen’s A3 rating was affirmed with a stable outlook.
Analysts at Moody’s forecasted that neither the European nor the North American markets will experience any significant 2006 growth, meaning manufacturers will not be able to materially increase their generally low capacity utilisation levels.
In its outlook, the investors service noted how the European automotive market displayed minimal signs of improvement but was essentially stagnant in 2005 as market prices remained under pressure on the back of only marginal GDP growth in the region.
Moody’s vice president Falk Frey, the principal author of the report, said: “The fundamental problem besetting the car industry – and mass manufacturers in particular – is the generally low levels to which capacity utilisation rates have fallen as consumer sentiment is dampened by rising fuel costs.”
In the context of significant overcapacity, analysts at Moody’s said incentives have become increasingly important and were partly responsible for the volume growth that was achieved by specific companies in 2005. Any volume gains next year are thought to be reliant on continuing incentives, or the popularity of less profitable fleets.
Frey added: “Based on the negative industry fundamentals, we do not expect any improvements in cash generation from underlying operations – or therefore in credit quality – over 2006. The ongoing weakness in cash generation is thus a key driver of the moderately negative slant to our views on the outlook for the ratings of European auto manufacturers.”
Moody’s expects little, if any, growth for the Western European car market in 2006, with private customers displaying particular reluctance to replace their vehicles.
