This updated methodology supplements and aligns the structure to Scope’s ‘Corporate Rating Methodology’, updated on 11 November 2015. It includes the separation of competitive position and industry risks, with the latter being assessed in terms of cyclicality, barriers to entry and substitution risk. Furthermore, Scope has sharpened the definition of key financial items/performance indicators in Appendix 1.

The methodology describes how Scope analyses the corporate credit risk of automotive suppliers based on its assessment of business- and financial-risk profiles, which is complemented with an analysis of other key supplementary rating drivers. The assessment is applied to companies that generate the majority of their total revenues and funds from operations from the production of parts and distribution of services to automotive manufacturers or respective secondary markets.

“The automotive supplier industry is exposed to a great deal of cyclicality and is characterised as very capital-intensive. Given the pre-financing requirements for production capacities, the volatility of an automotive supplier’s cash flow generation tends to be enormous,” says Timo Schilz, industry expert of Scope’s corporate rating team. “The cyclicality of the business makes it challenging for automotive suppliers to achieve ratings in the highest investment grade categories.”

To qualify for an investment grade rating, an automotive supplier should have a stable and substantial revenue base; strong and predictable cash flows (supported by a sound order backlog or a large contribution from aftermarket sales); meaningful innovative power in core products groups that safeguard a strong market position; as well as strong profitability and financial measures. Strong diversification in terms of geographies, product groups and customers also plays an important role.

In contrast, a small and volatile revenue base, vulnerable cash flows, and low innovative power can indicate a sub-investment grade rating. Further parameters pointing to a sub-investment grade rating are weak geographical, product and customer diversification, as well as less predictable cash flows, volatile profitability and weaker financial measures.

The methodology update does not affect outstanding ratings.

The ‘Rating Methodology – European Automotive Suppliers’ is available at www.scoperatings.com, or by clicking on the link.