Virus Onset in China’s ‘Motor City’ Darkens Auto Credit Outlook
2020-02-14

By Laura Benitez and Fabian Graber
(Bloomberg) — European junk-rated auto companies were just
starting to show signs of a recovery after a prolonged downturn,
with improving bond prices and encouraging results.
Then the coronavirus struck.
Investors fret that the disease could prove a major setback
for the industry, given its heavy exposure to China’s supply
chain. Wuhan, the epicenter of the outbreak is the country’s
fourth-largest auto producer, known locally as the nation’s
“motor city.”
Luxury carmaker Jaguar Land Rover became the latest
automaker to warn its lenders of potential disruption to its
supply chains outside of China this week. The announcement came
two days after first conceding the coronavirus is likely to
affect its fourth quarter performance. It’s also a fresh blow
for Aston Martin, the recent recipient of a cash lifeline, which
generates just under a quarter of its annual revenue in Asia.
“China is the world’s largest car market,” said Ilana
Elbim, senior credit analyst at Hermes. “The production halts
will have a significant effect on output for the year.”
Auto manufacturers and auto part makers, such as Gestamp
Automocion S.A., Samvardhana Motherson Automotive Systems Group
B.V., and Schaeffler AG, make up around 7% of Bloomberg’s
Barclays European high-yield index.
The spread of debt linked to the automotive industry
widened by around 50 basis points by mid-January but bounced
back recently as expectations rose that the effects would be
temporary, according to a report by credit analysis firm
SpreadResearch.
Investors say that the impact of the coronavirus on the
sector and wider high-yield markets generally have not been
taken into account. The complacency, they say, leaves them
vulnerable to significant and swift price mark downs.
“The coronavirus risk hasn’t been priced into high-yield
outside of the most obvious names and it could be seen as
worrying,” Brian Abdelhadi, senior portfolio manager at Allianz
Global Investors said in a phone interview.
Even investment-grade rated companies are coming under
increasing pressure. Renault SA slashed its annual dividend and
posted the first net loss in a decade on Friday, saying that new
emissions rules and the potential impacts of the coronavirus
clouded its outlook.

Beyond Cars

Yields are flirting with all time lows thanks to the
European Central Bank’s restarting of its bond-buying program in
October, meaning that high-yield valuations have become very
stretched, even for fragile companies.
Outside of the auto sector, there are numerous other
European credits that look vulnerable to the impact of the virus
as the fallout spreads.
“Some European hospitality, luxury and consumer goods
companies have exposure of 30% and more of their revenues to
China and Chinese travel so a hit to their earnings really
depends on how long the epidemic lasts,” Michael Seewald, head
of EMEA corporate ratings at S&P Global Ratings, said.
Investors have very little protection and bonds can quickly
drop on disappointing earnings, or any kind of volatility,
Allianz’s Abdelhadi added, saying that he expects that the real
financial implications on companies will be felt in the next
trading quarter.
“It’s likely parts of the market which haven’t moved yet
will go wider in coming months, and investors will regret not
getting out of certain names and sectors when they had the
chance.”