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S&P: Renault, Nissan, Mitsubishi must 'step up' cooperation to meet 2022 goals

Renault SA, Nissan Motor Co. Ltd. and Mitsubishi Motors Corp. need to "step up their level of operational cooperation," in order to achieve their objectives for 2022, according to an S&P Global Ratings report.

By 2022, the auto alliance between the three companies plans to raise the manufacturing capacity of its common platforms by about two-thirds, increase the rate of its common powertrains over unit sales to 75% and target synergies of about €10 billion, compared with €5.7 billion in 2017, according to the report.

According to S&P Global Ratings credit analyst Margaux Pery, the alliance should slow down its decision-making process until Nissan establishes its new leadership, following former Nissan Chairman Carlos Ghosn's arrest in November 2018 on financial misconduct charges. Ghosn was subsequently released from jail in Tokyo in early March. The three alliance partners have confirmed their intent to keep the alliance intact.

"Notably, decisions between partners are reached by consensus, and projects are only approved if they are beneficial to all partners. We think that, in a more challenging environment, it might become more difficult for the alliance to extend the scope of its activities while at the same time ensuring that decisions benefit all companies," Pery said.

If Nissan seeks a "rebalancing of powers" with Renault, as has been reported, it may change the alliance's current cross-shareholding structure, according to the S&P Ratings report. If Renault moves to reduce its stake in Nissan there could be negative credit implications, S&P found, after examining three possible scenarios.

In the first scenario — assuming that Renault maintains its 43% stake in Nissan, but Nissan increases its 15% stake in the French automaker to 25% — S&P Ratings said it would not expect a ratings impact for Renault since the increased stake would not trigger changes to the Japanese company's dividends as long as Renault maintained its current shareholding.

In the second scenario, Renault reduces its 43% stake in Nissan to 25% and Nissan increases its holdings to 25%, which would mean the French automaker would receive about €5.3 billion for selling the 18% of its Nissan shares and use half of the proceeds to issue a special dividend, according to the report.

Similarly, in the third scenario, S&P assumed Renault lowers its stake to 15%, equal to that of the Nissan, resulting in the company receiving about €8.2 billion for its sale of Nissan shares and using half of the proceeds for a special dividend.

In the second and third scenarios, S&P found that "a decrease in Renault's shareholding would result in a lower dividend for Renault from Nissan," Pery wrote in the report.

"This would weigh on Renault's adjusted EBITDA margins and free operating cash flow generation, only partly offset by a stronger balance sheet, depending on how it used the proceeds. This would likely trigger negative implications for our business risk profile assessment and consequently the rating on the French automaker, all else being equal," Pery explained.