1 rating trends and outlook auto industry, capital goods & automotive parts suppliers moody’s...
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![Page 1: 1 Rating Trends and Outlook Auto Industry, Capital Goods & Automotive Parts Suppliers Moody’s 2002 Corporate Finance Credit Outlook Investor Briefing New](https://reader035.vdocuments.us/reader035/viewer/2022062516/56649d5e5503460f94a3eadc/html5/thumbnails/1.jpg)
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Rating Trends and Outlook
Auto Industry, Capital Goods &
Automotive Parts Suppliers
Moody’s 2002 Corporate Finance Credit Outlook Investor Briefing
New York, January 15, 2002
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Auto Industry and Capital Goods
Bruce Clark
Senior Vice President
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Agenda
• Global auto industry challenges
• Regional auto challenges - U.S., Europe and Japan
• Rating implications
• Capital goods sector
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Global Industry Challenges
Excess capacity - 57 mil. produced vs over 70 mil. capacity
Ongoing cyclicality and concurrent downturns
Mature markets - U.S., Europe and Japan
Growth Markets - Asia, Latin America, Eastern Europe -
timing?
Intensifying competition - Product and geographic
expansion, product development time
Huge investment requirements
Flawed operating and financial model?
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US Industry Challenges
Profit concentration
SUV, Trucks, Minivans
Growing international competition in these segments
Minimal profitability in cars
Brand image and average age of customers
Excess capacity - plant & people
Weak international operations
Cyclical downturn
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US Vehicle Sales Trend
9
10
11
12
13
14
15
16
17
18
19
201
97
0
19
72
19
74
19
76
19
78
19
80
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98
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00
20
02
E
Moody’s Estimation RangeMoody’s Estimation Range15M - 15.5M Unit Sales15M - 15.5M Unit Sales
Uni
ts (
in m
illio
ns)
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Big-3 Net Income
-7,000
-6,000
-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,00019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
GM Ford Chrysler
US
$ (i
n m
illio
ns)
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Ability to Address Challenges
Position of strength in SUVs, trucks & minivans
Narrowing gap on quality
Adequate liquidity for downturn
Willingness to address operating model
problems
Past recoveries
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Rating Implications
Recent rating actions
Near-term focus:
Ability to hold share
Restructuring effortsScope
Cash costs
Cash benefits
Assumptions - market, share, pricing
Timing and magnitude of recovery
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Rating Implications
Where should ratings settle???
Timing and magnitude of financial recovery
Likely range of future operating and financial volatility
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European Industry Challenges
Block exemption expiration
End-of-life regulations
In roads by Japanese - more capacity
New facilities in Eastern Europe
Consumer migration - value for money and prestige
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Europe Vehicle Sales Trend
7
9
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15
1719
70
1972
1974
1976
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1980
1982
1984
1986
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1992
1994
1996
1998
2000
2002
E
Uni
ts (
in m
illio
ns)
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Japanese Industry Challenges
Weak economy
Stratification of competitors
Operating model can accommodate slack demand
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Japan Vehicle Sales Trend
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9
1970
1972
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E
Uni
ts (
in m
illio
ns)
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Rating ProspectsThe formidable
Toyota Aa1 Stable
BMW A1 Stable
Honda A2 Stable
The hopefulRenault Baa2 Stable
Nissan Baa3 Stable
Hyundai Ba2 Stable
The watchedVW A1 Stable
Peugeot A3 Stable
The challengedGM A3 Negative Fiat Baa2 Negative
Ford A3 Rev DG Mitsubishi Ba3 Stable
DCX A3 Negative Mazda Ba3 Stable
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Capital Goods
Paccar A1 - Stable
CAT A2 - Stable
Deere A2 - Negative
Ingersoll-Rand A3 - Negative
Cummins Baa3 - Negative
Navistar Ba1 - Stable
CNH Ba3 - Negative
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Capital Goods Rating Issues
Ongoing cyclicality
Hold fundamental competitive position
Long-term viability of the industry
Robustness of returns on up-side vs
Weakness on the down-side.
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Automotive Parts Suppliers
George A. Meyers
VP/Senior Credit Officer
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Background
Downgrades in 2001 reflect:• Shrinking volumes with high fixed costs• margin pressure• high debt burdens• diminished cash flows• liquidity issues• weakening debtholder protection measures
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Deteriorating Credit Metrics
Average Interest Coverage (x)
0
2
4
6
8
10
12
14
1996 1997 1998 1999 2000 9/01
Note: The average reflects figures from selected Auto Suppliers
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Deteriorating Credit Metrics
Average Total Debt:Capital
0%
10%
20%
30%
40%
50%
60%
1996 1997 1998 1999 2000 9/01
Note: The average reflects figures from selected Auto Suppliers
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Deteriorating Credit Metrics
Average Retained Cash Flow:Total Debt
0%
50%
100%
150%
200%
250%
1996 1997 1998 1999 2000 9/01
Note: The average reflects figures from selected Auto Suppliers
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Downgrades Reflect Industry’s Downturn
Auto Suppliers Average Rating History
A1
A2
A3
Baa1
Baa2
Baa3
Note: The average reflects ratings of selected Auto Suppliers
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Pessimistic Outlook for 2002
• Volumes down again– volatility and duration concerns
• Margin pressure– pricing demands from OEMs– implications for further cost reduction measures
• OEM concentration and market share erosion• Business/Product/Geographic diversity
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• Cash flow generation– from operations– proceeds from asset sales
• Sensitivity analysis• Working capital
– now a source, but for how long?
• Can capital expenditures really be cut back?– lean manufacturing initiatives
• Dividend cuts
Reduced Cash Flows Need Help
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• Financing flexibility– balance sheets strained– mergers and stock buybacks– Banks and investors - sector disfavor
• Funding sources - diversity• Financial covenant headroom• Near-term maturities• Contingent liabilities - rating trigger risks
Liquidity - Can Companies “Weather” the Downturn
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• Deteriorating fundamentals continue• Break-even levels need to be reduced,
suggesting more restructuring actions• OEM concentration and pricing demands are
concerns• Reduced cash flow generation heightens
liquidity concerns• More downgrades and outlook changes likely
in 2002
Summary