Fitch upgrades Pirelli’s credit rating to ‘BBB’

Fitch Ratings has upgraded Pirelli & C. Spa’s Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating from ‘BBB-’ to ‘BBB’, with a Stable outlook. The credit rating agency attributes this upgrade to Pirelli’s strong profitability and robust free cash flow (FCF), which have enabled significant deleveraging below Fitch’s previous positive rating sensitivity. Fitch anticipates resilient high-value tyre sales to support profitability amid stable raw material prices, even with fluctuating electric vehicle (EV) demand.
Key Rating Drivers
Successful Deleveraging: Pirelli has notably reduced its debt, with Fitch-adjusted EBITDA net leverage dropping to 2.0x in 2023 from 5.0x during the pandemic. This trend is expected to persist until 2027, supported by stable FCF margins of around 4 percent as the business shifts towards high-value products. Despite challenging market conditions, Pirelli is expected to maintain its deleveraging capability due to its focus on the less price-sensitive tyre segment.
Leading Operating Margins: Although the growth of EV sales in Europe is projected to slow without policy support, premium EVs should be less affected. Pirelli’s new homologations in the high-value segment, increased SUV penetration, slower raw material price increases, and internal efficiency programs are expected to enhance its EBIT margin to around 14 percent, positioning it among the top auto suppliers.
Low Exposure to Trade Tensions: Pirelli benefits from robust EV sales in China, catering to major auto manufacturers through its local plants and joint ventures. The company aims to increase the proportion of locally produced goods to about 90 percent by 2025 from 85 percent in 2023, reducing its exposure to trade tensions and enhancing control over sourcing and logistics.
Limited Shareholder Influence: Italian government measures limit the influence of Pirelli’s main shareholder, Sinochem International Corporation (37 percent stake), ensuring the company’s strategic independence through ‘golden power’ rules. Fitch rates Pirelli on a standalone basis, as there are no strategic, legal, or operational incentives for Sinochem to support Pirelli.
Antitrust Investigation: The EU antitrust authorities are investigating Pirelli and other leading tyre manufacturers for alleged price cartel activities for replacement tyres sold in the European Economic Area. The impact of this inquiry remains unquantified and will be assessed as more information becomes available.
Strong Niche Supplier: Although smaller than other global tyre manufacturers, Pirelli holds leading market positions in its core segments, bolstered by its expertise in high-performance tyres. Its weaker product diversification and limited scale are mitigated by the lower cyclicality of its end markets.
Resilient Business Model: Pirelli’s operations are less volatile than typical auto suppliers due to its focus on the stable replacement market. After divesting its industrial business, Pirelli now concentrates on premium and replacement tyres for cars, motorbikes, and cycles. Demand predictability in these sectors is high, with replacement cycles driven by safety requirements and regulations.
Derivation Summary
“Pirelli’s profitability and cash flow generation are among the highest in the auto supply industry with double-digit EBIT margins, as well as strong cash conversion and FCF margins,” writes Fitch. Pirelli’s initially high leverage was the result of the corporate reorganisation completed in 2016. Since its return to the stock exchange in 2017, Pirelli has been steadily deleveraging, before it was temporarily interrupted by the pandemic in 2020.
Solid profitability is partly offset by a slightly more-leveraged financial structure than its European peers’, but better than its lower-rated US peer The Goodyear Tire & Rubber Company’s (BB-/Negative). “We expect Pirelli’s cash flow generation and conservative financial policy to continue to support deleveraging.”
Key Assumptions
Fitch’s key assumptions for Pirelli include:
- Revenue CAGR for 2023-2027 of 2 percent driven by price/mix effects.
- EBIT margin above 13 percent in 2025-2026 due to a focus on high-value business.
- Net working capital investments averaging 1.0 percent of sales for 2024-2027.
- Capex at 6 percent of sales until 2027.
- Dividend payout of 40 percent of net income in 2024, increasing to 50 percent for 2025-2027.
- Restricted cash at 2.5 percent of sales.
Rating Sensitivities
Factors for positive rating action/upgrades include:
- EBITDA net leverage below 1.0x on a sustained basis.
- CFO less capex above 17.5 percent of debt on a sustained basis.
Factors for negative rating action/downgrades include:
- EBIT margin below 9 percent on a sustained basis.
- EBITDA net leverage above 2.0x on a sustained basis.
Liquidity and Debt Structure
Pirelli reported nearly EUR1.25 billion in cash and equivalents at the end of 2023, with EUR170 million treated as restricted. The company upsized its revolving credit facility to EUR1.5 billion in December 2023, enhancing financial flexibility. Strong cash flow generation has limited external funding needs, facilitating a gross debt reduction of over EUR2 billion from 2021 to 2023. Pirelli’s debt structure is diversified, comprising a mix of banking and debt-capital market facilities, including an equity-linked bond. The company successfully tested capital-market access in July 2024, with its five-year EUR600 million 3.875 percent ESG bond being oversubscribed by more than 4.6 times.
ESG Considerations
Fitch’s ESG Relevance Scores indicate that ESG issues are credit-neutral or have minimal credit impact on Pirelli. For more information on Fitch’s ESG Relevance Scores, visit Fitch Ratings ESG Relevance Scores.
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