Our recent automotive sector rating actions reflected the breadth and severity of the impact that the coronavirus outbreak is having on automotive demand. In late March, we placed the ratings of most US, Asian and European automakers and parts suppliers on review for downgrade and downgraded a number of them as well. We also cut our 2020 forecast for global auto unit sales, which we now believe will plunge 14% this year (see “Automotive Manufacturing and Parts Suppliers – Global: Outlook update: Decline in auto sales to accelerate on expanding coronavirus impact”). There is a significant risk that we will lower our sales projection again if it appears that the accelerating spread of the pandemic in the US and Europe will keep lockdowns and “shelter in place” mandates in place well beyond Easter.
In most of our automaker rating actions, we placed the companies' ratings on review
for downgrade, while in the case of some, such as Ford Motor Company (Ba2 review for downgrade), Toyota Motor Corporation (A1 review for downgrade), Nissan Motor Co. Ltd. (Baa3 review for downgrade), Honda Motor Co. Ltd. (A3 review for downgrade) and BMW AG (A2 review for downgrade), we downgraded their ratings as well as placed them on review for downgrade. These latter companies had already been weakly positioned within their respective rating categories before the coronavirus outbreak, as was reflected by the fact that the ratings of Toyota, Nissan, Honda and Ford had already been on negative outlook. In addition to dealing with coronavirus-related business challenges, Nissan and Ford are in the midst of major restructuring programs. At Honda, the profitability of its core automotive business is weak and its motorcycle business is highly exposed to volatile emerging economies. Thus, we had concluded that these companies would not be able to sustain their previous ratings through this downcycle.
We believe that large or investment-grade automakers, such as Toyota, BMW and General Motors Company (credit facility Baa2 review for downgrade) have adequate liquidity to tide them over through significant cash consumption for working capital needs through the second and third quarters of this year until a moderate rebound in the fourth quarter. Smaller, or very low-rated, automakers will be more exposed, with the potential for some specialist niche manufacturers to collapse within a short period without additional support from shareholders or central governments.
Automakers with large captive finance subsidiaries, like BMW, Daimler AG (A3 review for downgrade) and Volkswagen Aktiengesellschaft (A3 review for downgrade), face significant near-term refinancing needs. However, at a time when car sales
are tumbling, their financing needs will be greatly reduced, while their maturing debt will be backed by the underlying asset to be liquidized. We expect this year's sharp decline in auto unit sales to be accompanied by a global decline in new financing. As a result, the portfolios of captive finance subsidiaries will be wound down, providing their parent companies with a source of cash until their portfolios swing back to growth.
As shown in Exhibit 1, most automakers are contending with the coronavirus-related drop in demand with a more significant liquidity buffer than they had during the 2008 financial crisis. Liquidity is particularly strong among most European and Asian auto manufacturers, which provides a degree of confidence in their ability to manage through the next few quarters of high cash burn. Furthermore, we believe that the sizable government aid packages that were announced in late March will be beneficial for the sector, especially large enterprises like auto manufacturers and provide liquidity support to their captive subsidiaries in case of need.
The profitability of many leading European and Asian automakers was weaker in late 2019 than it was at the start of the 2008 financial crisis. As shown in Exhibit 2, Moody's-adjusted EBITA margins were down modestly at Toyota, Volkswagen and Fiat Chrysler Automobiles N.V. (Ba1 review with direction uncertain) from 2008 levels, with a somewhat steeper decline at Daimler and Honda
and a steep plunge at Nissan and its strategic alliance partner Renault S.A. (Ba1 review for downgrade). In addition to the impact
of company-specific challenges, lower margins are also partly a reflection of the broader challenges facing the sector as it makes significant investments to comply with stricter regulatory emissions requirements and to make progress in the transition to increasingly electrified fleets and to develop connectivity and autonomous technologies.
Despite reduced profitability, most automakers' balance sheets show that leverage is not a major pressure point. Thus, the rise in leverage that we anticipate this year as a result of sharply declining profits will not be a major concern for most companies. The key rating drivers will be the ability of automakers to recover profits, profit margins and cash generation within the next two years in order to remain adequately positioned in their respective rating categories.
In the wake of the coronavirus-related shocks, we expect global GDP to contract slightly in 2020, which will include a plunge in business activity during the first half of the year. For the time being, most European and North American automotive production facilities are closed, as are factories along the broader auto supply chain. An acceleration in the spread of the coronavirus could prolong these production shutdowns and further delay a recovery in auto unit sales.
In China, where auto production recently restarted after a temporary shutdown, we believe that auto sales could rebound strongly in the second half of the year, with double digit year-over-year increases in the third and fourth quarters. But we believe that sales will continue to plunge in the third quarter in Western Europe, with a more modest decline in Japan, before demand begins to recover in those markets in the fourth quarter.
But whether we see an end-of-year recovery in global auto sales will depend on the success of efforts to contain the coronavirus pandemic, the duration of shelter-in-place orders and restrictions on freedom of movement stay in place and how quickly consumer sentiment will rebound.
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