Fitch Ratings on Oct. 7 affirmed the long-term issuer default ratings of Compagnie Générale des Établissements Michelin SCA and its subsidiary Compagnie Financière Michelin SCmA at A- with a stable outlook.
The rating agency also affirmed the short-term issuer default ratings of the French tire manufacturer and its unit, as well as Michelin's and Michelin Luxembourg SCS's short-term debt at F2.
Fitch said it expects the weakening of Michelin's financial structure in 2018 to be temporary and that the company's leverage metrics will return to levels more at par with the ratings within the next two years.
The agency also projects a robust free cash flow generation for Michelin and a solid integration record to support a decline in funds from operations adjusted net leverage.
Fitch said a shift back to a less aggressive acquisition strategy in the next 12 to 18 months could ease its concerns about a potential transition in financial strategy for Michelin and strengthen Fitch's assessment of Michelin's financial flexibility score.
Fitch said an upgrade is likely if Michelin's free cash flow margin grows to about 3% from 2.2% in 2018, if funds from operations adjusted net leverage falls below 1x, or if cash flows from operations or lease-adjusted debt exceeds 65% from 39% in 2018.
Conversely, a downgrade is also likely if free cash flow margin falls under 2%, if funds from operations adjusted net leverage grows above 1.5x, or if EBIT margin is below 10%.
