Italian Auto Maker Piaggio & C. SpA Downgraded To 'B+' Due To Coronavirus Impact; Outlook Negative

  • The coronavirus (COVID-19) pandemic in Europe is likely to weigh on Piaggio & C. SPA's (Piaggio's) sales and profit margins in 2020.
  • We expect significantly lower sales from Italy and other European countries leading us to expect adjusted funds from operations (FFO) to debt to decline to 10%-15% in 2020, from above 20% at year-end 2019, absent management's actions to protect the balance sheet or positive effects of government stimulus packages.
  • We are therefore downgrading Piaggio to 'B+' from 'BB-'.
  • The negative outlook reflects our view that in the near term Piaggio's credit metrics and liquidity could be further dented by a more pronounced COVID-19 pandemic in its key regions and subsequent containment measures by governments.
MILAN (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above.
Piaggio's credit metrics and liquidity could further deteriorate as COVID-19 progressively spreads beyond Italy to the rest of Europe.  The rating downgrade primarily reflects our expectation that the company's profit margins and cash flow generation are likely to be weaker in 2020. We expect the Italian market lockdown to extend into second-quarter 2020. Coupled with similar lockdowns in other European markets, this will result in a significant sales decline in the company's most important sales quarter, ending June 30. Under our updated base-case scenario, which foresees no growth in the second half of 2020 against the same period of 2019 and moderate growth in 2021 of about 2%, we expect 2020 sales to decline by about 10% and adjusted EBITDA margins to fall by about 300 basis points (bps) in 2020 from about 13% in 2019. Moreover, we see adjusted FFO to debt decreasing to 10%-15% by year-end 2020, from above 20% at year-end 2019. Given the company's exposure to Europe, representing about 50% of sales, and its seasonal working capital, we believe that these metrics are now more commensurate with a 'B+' rating. Although not included in our base case, we acknowledge that the company has room to maneuver by potentially revising capital expenditure (capex) plans, lowering dividends, and efficiently rightsizing its cost base. Moreover, we understand that several European governments are introducing stimulus packages that could alleviate cash needs and improve EBITDA. Conversely, the negative outlook primarily reflects the very low visibility on the severity and ultimate length of the COVID-19 pandemic and its bearing on customer demand, production, and supply chain operations. This ultimately affects the company's credit ratios and could have effects on its liquidity.
Liquidity and covenant headroom are adequate under our revised base-case scenario, however, very severe market conditions could drag on Piaggio's liquidity.  As of Dec. 31, 2019, we estimate that Piaggio has more than €360 million of liquidity sources available (about €150 million of cash that we estimate will be accessible and €215 million of committed credit facilities), which should enable the company to meet its short-term debt maturities, capex, and high seasonal working capital needs. Under our current base case, we foresee that those liquidity sources should be sufficient to deal with the likely drop in second-quarter demand in Europe. Nevertheless, we note that the second quarter is the most important for Piaggio in terms of operating cash flow generation.
Good market momentum for the first two months of 2020 has been erased by the COVID-19 pandemic in Europe. We understand that the first two months of 2020 were very supportive in terms of sales, with all markets contributing to revenue growth above that seen in the same period of 2019. However, the lock down Italian market since March 2020, followed by several other European countries, will likely materially dent consumer demand starting in the second quarter of 2020. In 2019, sales from Europe and the Americas represented about 60% of Piaggio's turnover.
The negative outlook reflects the risk that we may need to further revise downward our current base case if the COVID-19 pandemic continues beyond the second quarter and in other geographies. This could result in Piaggio's credit metrics and liquidity position materially deteriorating, absent management's quick actions to proactively tackle the downside risk.
We could downgrade Piaggio if the company's cash position, including its available committed revolving credit facility (RCF), were to fall below €200 million, or if its covenant headroom were to reduce to 15% or below, leading liquidity sources over uses to likely fall below 1.2x. Furthermore, prospects of materially negative free operating cash flow (FOCF) and adjusted leverage sustainably above 5.0x would result in a downgrade.
We could revise the outlook to stable if Piaggio withstood the COVID-19 pandemic's effects by showing FFO to debt above 15% and an adequate liquidity profile by year-end 2020.

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