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Ill Named VALEO

03 August 2020 by lberuti

FRFP ( Valeo ) is one of Europe’s largest car part suppliers, making components for most global car makers. It has about 136 production sites scattered around 29 countries. It operates four business groups: Comfort and Assistance Systems (interior controls and security systems), Powertrain Systems (engine and electrical systems, transmissions), Thermal Systems (climate control, compressor, engine cooling), and Visibility Systems (lighting and wipers). If the company name means “I am doing well” in Latin, its diversification was not enough to spare it from suffering from the impact of the COVID-19. S&P expects FRFP’s earnings, cash-flow and leverage to deteriorate materially in 2020 from already weak levels in 2019. The demand for cars has plummeted due to the extensive lockdowns imposed by governments to combat the spread of the pandemic. S&P reckon their expectations of a 20-25% decrease of auto unit sales in Europe, 21% in the US and about 10% in China for the full year 2020 should translate into a 17-18% sales drop for FRFP. They foresee a significant cash burn, and “given the slow pace of market recovery, (they) expect Valeo’s free cash flow to remain subdued in the next two years and that cash contributions to its joint venture Valeo Siemens eAutomotive will further limit its ability to reduce debt”. They therefore lowered FRFP’s rating to junk, from BBB- to BB+, triggering an 11.5bps widening of its 5-year risk premium, despite a now stable outlook. It made it the worst performer among the iTraxx Main constituents, in an otherwise fairly bulled up session. iTraxx Main closed at 58bps, its tightest level since late February…