latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/probability-of-default-jumps-for-automakers-as-covid-19-hits-production-sales-58115758 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Contact Us

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

Probability of default jumps for automakers as COVID-19 hits production, sales

Gauging Supply Chain Risk In Volatile Times

S&P Global Market Intelligence

Cannabis: Hashing Out a Budding Industry

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

The Market Intelligence Platform


Probability of default jumps for automakers as COVID-19 hits production, sales

The odds of default for automakers spiked in April from January as the industry grapples with lower vehicle demand and temporary production shutdowns during the coronavirus pandemic.

S&P Global Market Intelligence's median one-year market signal probability of default rose to above 20% for automakers in early April, up from below 5% at the beginning of 2020. The figure represents the odds that a company will default on its debt within the next year based on fluctuations in the company's share price and other country and industry-related risks.

Experts predict a tough road ahead for automakers as vehicle demand drops sharply while consumers stay home and companies have shuttered plants to keep workers safe. The turmoil has caused several automakers to withdraw earnings guidance for 2020 and issue profit warnings. Japan's Nissan Motor Co. Ltd., U.S.-based Ford Motor Co., and Germany's Daimler AG are some of the top carmakers with the highest one-year probability of default, according to Market Intelligence data.

SNL Image

The current default odds for automakers are still lower than during the financial crisis of 2008. At that time, the industry's probability of default rose to 35% by October 2008 from slightly above 5% at the beginning of that year, according to Market Intelligence data. General Motors Co. and Chrysler, now Fiat Chrysler Automobiles NV, both filed for Chapter 11 bankruptcy protection in 2009 after the U.S. government provided bailouts for the two automakers in 2008.

In comparison, this year, the retail industry — one of the hardest-hit sectors during the pandemic — saw the median one-year market signal probability of default rise to above 40% for some sectors in early April, up from below 10% at the end of February.

Major automakers can weather the financial crisis, experts said, though suppliers could be harder hit in the long term. Still, questions about another U.S. industry bailout persist as automakers' earnings are in trouble as vehicle sales plunge and many plants sit idled around the globe.

Industry challenges

Global light-vehicle sales are expected to fall 22% in 2020 compared with 2019 because of the pandemic, according to an April 21 IHS Markit report. The analytics firm expects sales of about 70.3 million vehicles in 2020, down from the previous forecast of 88.8 million.

Automakers halted production in China, where the outbreak began, in February, before doing the same in Europe and North America as the virus spread to those regions. Car plants in North America have been idled since mid-March.

SNL Image

The top five automakers with the highest one-year probability of default scores are Nissan at 32.6%, Indonesia's PT Astra International Tbk at 31.2%, Ford at 29.3%, Daimler at 28.4%, and GM at 26.5%, according to Market Intelligence.

The two-year probability of default increases for the five automakers, with Nissan at 38.5%, PT Astra at 37.1%, Ford at 35.2%, Daimler at 34.3% and GM at 32.3%, according to the data.

Wally Hopp, professor and associate dean at the University of Michigan's Ross School of Business, said financial issues stemming from the pandemic could last for years.

"Every reasonable forecast I have seen calls for a sudden decrease — larger than the one in 2008-2009 — in automotive demand, followed by a slow recovery," Hopp said. "It's hard to imagine the millions of people who have been thrown out of work and who will be struggling with their personal finances running out to buy a new car anytime soon."

Suppliers also at risk

Although the impacts from stay-at-home orders and halted business operations will affect the U.S. auto industry as a whole, experts say smaller to medium-sized suppliers face heightened risk.

Suppliers are dealing with shutdowns, labor issues and disruptions of their own suppliers, Hopp said. Small and midsize suppliers with less ready access to credit will be hardest hit, he said, adding that these companies are likely to file for Chapter 11 bankruptcy protection to stay open or to sell assets.

"I would not be surprised to see some of the major [original equipment manufacturers] encourage their Tier 1 suppliers to buy up some of these distressed assets as a means for further consolidation of the industry as a way to facilitate the capex investments needed to make the shift toward new technologies, such as electrification and autonomous vehicles," Hopp said.

The largest auto suppliers are likely to weather the crisis, assuming plants reopen soon, because these companies have "deep pockets and large credit lines," Morningstar analyst David Whiston said.

Magna International Inc., one of the top auto suppliers, on April 14 increased the size of its revolving credit facility to $1 billion from $330 million and extended the maturity date to April 12, 2021, from June 2020.

Companies with lower debt and leverage heading into the pandemic — including Fiat Chrysler, auto technology company Gentex Corp., and Magna International — are better positioned to survive impacts from the crisis, said Garrett Nelson, senior equity analyst at CFRA Research.

Another bailout

Nelson said he would not rule out the possibility of a government bailout of the auto industry since fallout from the pandemic will likely be worse than the 2008-2009 financial crisis.

U.S. light-vehicle sales are forecast to drop 26.6% year over year to 12.5 million units in 2020 due to low vehicle demand and temporary plant shutdowns as the outbreak impacts business operations across the globe, according to IHS Markit. About 13 million vehicles were sold in the U.S. in 2008.

SNL Image

"We believe some U.S. manufacturing plants will restart in the coming month, but restarts will largely depend on the geographic location of the plants and number of COVID-19 cases in those areas," Nelson said. "Also, health precautions such as social distancing and weak consumer demand will lead to most plants operating at much lower utilization rates."

Whiston said the likelihood of major automakers defaulting depends on when manufacturing plants reopen.

"If GM and Ford can't reopen roughly six months from now, they will die unless they get new funding," he said.

Ford, which was already struggling in 2019 after posting disappointing earnings results, is being hit harder financially since it already eliminated its dividend, unlike GM. GM could announce a dividend cut, but Whiston thinks it depends on the automaker's expectations of plants restarting. GM's restructuring in late 2018 has helped the company, he said, as GM is expected to save $4.5 billion from the plan.

SNL Image

Part of the concern is that companies could be cut off from creditors, said Joseph Foudy, an economics professor at New York University.

"You get into a cycle where we downgrade them, which raises their borrowing costs, which leads to more fears of insolvency, which leads to downgrading, and you get into some kind of cycle where the downgrades themselves become the problem because they get cut off from banks," he said.

S&P Global Ratings downgraded Ford to BB+ from BBB- and placed the automaker on CreditWatch Negative. The agency also placed all ratings of GM, Toyota Motor Corp., Nissan and Honda Motor Co. Ltd. on CreditWatch Negative because of the pandemic. Also, Moody's Investors Service placed ratings of GM, Daimler, Fiat Chrysler, Jaguar Land Rover Ltd., Peugeot SA, Volkswagen AG, Volvo Car AB (publ.), and McLaren Holdings Ltd. on review for a possible downgrade.

A company's credit rating matters because it can directly affect borrowing costs, Foudy said.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.