The special report, which analyses the liquidity of European automotive suppliers, shows that most companies have moderate liquidity profiles, indicating that expected free cash flow generation and cash balances may not be adequate to meet funding needs over the next two years, but that external funding sources, including committed bank facilities, are expected to meet these requirements. Fitch notes that Continental AG ('BB'/'B'/Negative) has a relatively weak liquidity profile to peers, being exposed to a substantial amount of maturing debt and related refinancing risk, particularly from a EUR3.5bn tranche stemming from its VDO acquisition facility due in August 2010.
The auto supply industry faces extreme pressure in the wake of the significant downturn in global vehicle markets, the trend towards smaller, more fuel-efficient and environmentally-friendly cars and highly-challenging financing conditions. The global recession and decline of consumer confidence, in combination with tighter credit availability, has led to a drop of 20%-30% in new car registrations in mature markets since the second half of 2008. Fitch expects car sales to decline by more than 15% in Europe in 2009 and likely to continue falling in 2010, although to a much lesser extent. This slump in demand will further affect suppliers' financial profiles, leading to reduced profitability, cash flow generation and significantly higher financial leverage.
The effect of scrapping incentives for old cars implemented in several countries in Europe may mitigate the severity of negative underlying demand for new vehicles and should limit the extent of the market downturn in the short term. However, Fitch believes that demand is brought forward rather than stimulated in absolute terms. Looking at previous experiences in the US or Europe, a pay-back effect is likely when incentives stop.
Against this backdrop, several - often smaller- to medium-sized - suppliers are exposed to severe financial distress with the need for deep restructuring measures, or have already filed for insolvency. Fitch believes that default rates will materially increase in the sector during the course of 2009 which will lead to accelerated consolidation with the stronger and financially well-positioned players benefiting in the medium-term.
The sector's stress is also evident by the credit deterioration of Fitch's shadow-rated automotive portfolio, with 50% now rated at 'CCC'* or below as of March 2009, compared to only 9% as of June 2008.
