Scope Ratings would like to thank market participants who provided feedback on its methodology for automotive and commercial vehicle manufacturers, published as a call for comments on 22 September 2016. The final rating methodology confirms the core principles of our rating approach and provides some additional clarifications.

"Plagued by structural overcapacity in mature markets, the automotive industry is characterised above all by its high cyclicality. In addition, substantial investment in R&D as a result of stringent regulation on pollutant emissions will burden cash flow generation going forward – this is particularly true for European auto and truck makers”, says Timo Schilz, industry expert in Scope’s corporate rating team. “The inherent cyclicality and increasing secular pressure of the business makes it challenging for auto and truck makers to achieve ratings in the high investment grade categories."

Parameters that can qualify an automotive and commercial vehicle manufacturer for an investment grade rating:

• Sustainable market share in specific product categories or geographic regions
• Strong brand position and customer awareness
• Well-balanced product portfolio, ranging from entry-level to premium cars, supporting predictable operating results
• Presence in a broad range of different end-markets
• Moderate shareholder remuneration policy with dividend payout ratios in the 30-50% range
• Strong liquidity and high financial flexibility supported by either cash, liquid investments or committed credit lines, typically with a buffer for withstanding adverse changes in economic conditions and pronounced downturns
• Rare use of share buybacks or transformative M&A

Parameters that indicate a non-investment grade rating:

• Limited and negatively trending market shares
• Modest competitive position with a limited product portfolio
• Weak product pipeline
• Limited geographic diversification
• Less predictable and more volatile operating earnings and cash flows as a result of a limited or weak product pipeline
• Moderate or limited financial flexibility
• Excessive shareholder remuneration policies including high dividend payouts (above 50%) or the use of share buybacks

The ‘Rating Methodology European Automotive and Commercial Vehicle Manufacturers’ is available here. The detailed feedback report is available here.