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Auto Giants Across the Globe Warned of Coming ‘Credit Shock’

Oliver Sachgau, Christoph Rauwald and Keith Naughton

(Bloomberg) -- BMW AG, Ford Motor Co. and Toyota Motor Corp. were downgraded by Moody’s Investors Service and their major European, U.S. and Japanese competitors were put under review for possible cuts as the coronavirus pandemic raises risks for automakers worldwide.

BMW, the European carmaker with the best credit profile, was dropped one level to A2, while Ford’s rating fell to Ba2, another rung into junk. Moody’s put General Motors Co. under review along with Daimler AG, Jaguar Land Rover Automotive Plc, PSA Group, Renault SA, Volkswagen AG, Volvo Car AB and McLaren Holdings Ltd. In Japan, Toyota, Nissan Motor Co. and Honda Motor Co. were downgraded on Thursday.

The rapid spread of the outbreak, a deteriorating economic outlook, falling oil prices and asset price declines are “creating a severe and extensive credit shock,” Moody’s said in a statement. “The combined credit effects of these developments are unprecedented.”

Auto manufacturers and their parts suppliers have halted factories on both sides of the Atlantic amid government measures to isolate populations and restrict travel. The wave of work stoppages occurred as the viral epicenter moved to Europe from China and intensified in the U.S., halting sales and rippling through supply chains.

Demand will drop “meaningfully” over the coming months, especially in Europe and North America, Moody’s said. It anticipates global demand will shrink about 14% in 2020 and could slump by roughly a third in the second quarter.

‘Under Pressure’

Japanese automakers are especially vulnerable because of the pandemic exacerbating “pronounced cyclical downturns and changing consumer demand,” Moody’s said, leaving them “vulnerable to shifts in market sentiment in these unprecedented operating conditions.”

Toyota, which had the strongest credit profile among Japan’s auto companies, was cut to A1 from Aa3, while Honda was downgraded to A3 from A2. Nissan, which has seen decade-low profits and management turmoil since the November 2018 arrest of former Chairman Carlos Ghosn, was already the lowest in terms of credit ratings out of Japan’s top three carmakers. Moody’s cut Nissan’s rating to Baa3 from Baa1.

Moody’s for now assumes GM and Ford’s full-year shipments will drop by as much as 18%, though it warned “risk to the downside is considerable.” GM shares pared a gain of as much as 9.6% to close up only 1.8% in New York. Ford, which had surged as much as 19% intraday, finished the day with an 8.9% advance.

S&P Global Ratings still ranks Ford one step above junk. On Wednesday, the firm also put GM’s rating on watch for negative action.

“Automaker credit rankings are increasingly under pressure -- another negative catalyst for bondholders -- and we suspect more downgrades loom globally, with Ford and Renault possibly becoming fallen angels,” Bloomberg Intelligence analyst Joel Levington said in a note.

While GM probably can avoid a junk rating, falling into speculative grade causes problems for automakers’ lending units, Levington said by phone. Both GM and Ford get lots of cash from writing auto loans, and lower-rated debt makes borrowing more expensive.

“It’s not the end of the world if one of these companies falls into high-yield,” he said. “But both Ford and GM make a lot of money from financing and their margins would go down.”

State Support

French Finance Minister Bruno Le Maire this week pointed to the country’s auto and aeronautics industries as needing government support. The state has holdings in Renault and PSA. While Renault Chairman Jean-Dominique Senard has dismissed a re-nationalization of the carmaker, he told Le Parisien the firm may ask for government guarantees. Renault shares rose as much as 2.8% in Paris.

VW brand’s global sales chief Juergen Stackmann told Frankfurter Allgemeine Zeitung in interview he expects a “normalization” of the situation on the German manufacturer’s home turf in the summer. The coronavirus won’t disappear entirely by then, but society and the economy can’t cope with a shutdown that lasts for longer, he said.

The outlier in Moody’s latest report was Fiat Chrysler Automobiles NV, placed under review “with uncertain direction.” The Italian-American manufacturer faces the same daunting situation as peers, but the planned merger with PSA might potentially result in a higher rating of the combined group than Fiat Chrysler’s current standalone rating, it said.

BMW’s downgrade was driven by its already weak standing within the A1 ratings category, the agency said.

The Munich-based carmaker last week warned that both profit and sales would fall significantly this year as the pandemic disrupts production and supplies. The company has idled its European plants, as well as its largest plant in the U.S. in South Carolina, for more than two weeks.

(Updates with Japanese automakers’ rating cuts.)

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