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Moody’s sees weaker credit metrics for auto parts suppliers until 2022

Moody’s Investors Service has released a new report showing a sharp decline in global auto unit sales this year and uncertainty over the pace of the subsequent Coronavirus recovery will pressure global automotive parts suppliers into 2022.

“In the global auto parts suppliers sector, we have downgraded about $137 billion of the approximately $212 billion in rated debt since the beginning of March. Two thirds of companies in the sector have negative rating outlooks because the global recession will have a severe impact on their operating performance and credit metrics and could lead to rating downgrades. Amid a partial recovery in global GDP, auto sales volumes are likely to remain below 2019 levels through at least 2022,” says Matthias Heck, a vice president and senior credit officer at Moody’s.

After downgrades, uncertainty about pace of auto sales recovery to pressure parts suppliers

Our expectations for a sharp decline in global auto unit sales this year and uncertainty over the pace of the subsequent recovery will pressure global automotive parts suppliers. In the wake of the global recession brought on by the coronavirus outbreak, we downgraded the ratings of 24 of out the 62 rated auto parts suppliers. Twothirds of the companies in the sector have negative rating outlooks, which acknowledge the potentially severe impact that the global recession could have on their operating performance and credit metrics. Amid a partial recovery in global GDP, auto sales volumes are likely to remain below 2019 levels through at least 2022.

Auto parts suppliers took immediate actions to address liquidity.

After we placed the ratings of auto parts suppliers under review in March, companies in the sector took immediate action to shore up liquidity, such as seeking external funding, taking steps to boost internal liquidity or demonstrating strong governance, such as by scaling back shareholder distributions and management compensation. Nearly all rated parts suppliers
initiated efforts to cut costs, while most also reduced capital spending. These actions created much higher levels of operating flexibility to contend with automakers’ temporary plant closings and the gradual reopening of their facilities.

Aftermarket companies and tire manufacturers likely to weather downturn

Aftermarket parts suppliers have demonstrated their ability to adjust their operations and inventory levels to significantly reduced demand levels. As retailers and the distribution channel restocked, these companies benefited from an early recovery of demand. Free cash flow for aftermarket parts suppliers should be reasonably robust by year-end 2020. As economically stressed consumers put off car purchases to focus on their existing
vehicles, large tire manufacturers are positioned to benefit

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