Fitch Relegates Michelin to BBB-

Fitch Ratings has downgraded Compagnie Generale des Etablissements Michelin Long-term Issuer Default Rating (IDR) and senior unsecured ratings to a BBB- rating from BBB. According to a statement detailing the news, Michelin’s “outlook for the long-term IDR is negative.” The downgrades are said to reflect “the further deterioration of Michelin’s financial profile beyond Fitch’s previous expectation amid the accelerating downturn in the global auto markets…” Noting that the group net leverage has increased 50 per cent (to 2.7x at full-year 2008 from 1.8x at full-year 2007), the agency said it “does not expect a marked improvement in the tyre manufacturer’s financial profile before 2010.”

The analysts put the deterioration down to the slump in tyre demand the market has experienced “particularly in the fourth quarter of 2008.” Fitch expects a further decline of the global tyre markets in the first half of 2009, primarily due to significant production cuts by vehicle manufacturers. “A key issue for management is adjusting its manufacturing capacity to reflect expected volumes in the future,” the agency said in its statement.

Michelin absorbed nearly 1 billion euros of additional expenses in 2008, of which 804 million euros was related to raw material cost inflation and 164 million euros was tied to higher energy and transportation costs. Sales decreased by 3.5 per cent in the second half of 2008 compared to the same period in 2007. However, Michelin’s profitability should benefit from several price increases announced in 2008 in combination with lower raw material prices, particularly for natural rubber and oil derivatives. The company has also announced that it is slashing capital expenditure by around 45 per cent to roughly 700 million.

“While Fitch acknowledges management’s measures to encounter the downturn, the heightened risk of a severe and protracted global recession could jeopardise the group’s plan for materially improving cash flow. A prolonged weakening of the automotive industry could have further negative effects on volumes, capacity utilisation and increase price pressure,” the ratings agency said in its statement.