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Announcement:

Moody's changes outlook on Michelin's Baa2 ratings to positive from stable

Global Credit Research - 12 Jan 2011

Approximately EUR1.4 billion of debt affected

Frankfurt am Main, January 12, 2011 -- Michelin's Baa2 rating continues to be supported by the group's strong competitive position, reflecting the group's scale, strength of its brand name and position as one of the three leading global tire manufacturers. Approximately 80% of revenues are driven by replacement tire demand which is strongly related to GDP growth but tends to be less cyclical than OE demand and allows for pricing flexibility. Consequently, Michelin in line with its closest peer Bridgestone has been able to generate consistently higher profit margins than many other auto suppliers and auto manufacturers.

However, the rating remains constrained by its exposure to the volatility of natural and synthetic rubber prices, which reached historic highs in 2010. Michelin's ability to implement positive pricing actions is critical for offsetting higher raw material costs and preserving healthy profit margins going forward. In addition, the rating considers Michelin's challenge to sustain the positive momentum in FCF generation despite rising investments needs for expanding its global footprint and defending its technological advantage which represents a key hurdle to further rating migration.

The change in Michelin's outlook to positive acknowledges the improvements in Michelin's operating performance and cash flow generation over the last several quarters and anticipated to have been achieved for fiscal year 2010. This highlights the group's progress in realising cost savings, recovering industry volumes as well as a positive price/mix effect. FCF benefited from a tight control of capital expenditures, working capital and dividend payments.

The positive outlook anticipates that Michelin will be able to show further improvements in its profit margins and credit metrics in 2011. However, FCF generation is expected to be constrained by high investment needs to fund growth in emerging markets and R&D needs to defend its technological leadership.

Furthermore, we expect the group to preserve a conservative financial policy and healthy liquidity profile consistent with a solid Baa-rated company.

Michelin's ability to pass on higher raw material costs to customers in the replacement market will be a critical driver for preserving healthy profit margins in future. Moody's would consider to upgrade Michelin's Baa2 long term ratings should Moody's gain confidence over the next 12-18 months that the anticipated improvements in key financial metrics in 2010 could be sustained e.g. (i) a de-leveraging of Michelin's current balance sheet, evidenced in RCF/Net Debt ratios sustainable around 30%, (ii) a return to historically high EBIT margins of around 9% and (iii) consistently positive free cash flows .

Negative rating pressure could arise in the event of a reversal of recent improvements that would lead to weakening of the company's credit metrics and be reflected in leverage of Debt/EBITDA above 3.0x in 2010, failure to generate positive free cash flow on a sustainable basis and inability to maintain RCF/net debt ratios constantly above 20%.

Moody's regards Michelin's liquidity profile as solid. At June 30, 2010 the group's liquidity position consisted of EUR767million in cash & cash equivalents, EUR120million in marketable securities and full availability under its committed credit line of EUR1.5 billion maturing in July 2012.

These liquidity sources and expected operating cash flow generation should fully cover the potential needs arising from capex, working capital, day-to-day needs, dividend payments and short-term debt maturities.

Outlook Actions:

..Issuer: Compagnie Financiere Michelin

....Outlook, Changed To Positive From Stable

..Issuer: Compagnie Gener. des Etablissements Michelin

....Outlook, Changed To Positive From Stable

..Issuer: Michelin Invest Luxembourg SCS

....Outlook, Changed To Positive From Stable

..Issuer: Michelin Luxembourg SCS

....Outlook, Changed To Positive From Stable

The last rating action on Michelin was an upgrade of Compagnie Générale des Etablissements Michelin's ("CGEM") long term ratings to Baa2 from Baa3 and its short term ratings to P-2 from P-3 with a stable outlook thereby eliminating the notching for structural subordination between CGEM, the ultimate parent company, and its subsidiary Compagnie Financière Michelin (CFM) on July 24, 2008.

The principal methodologies used in rating Michelin were the Global Automotive Supplier Industry published in January 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Clermont-Ferrand, France, Michelin is one of the three leading tire manufacturers in the world. In 2009, revenues were approximately EUR14.8 billion. The group offers the full range of tire products, particularly for passenger cars and light trucks as well as heavy trucks. Other activities include the manufacturing of specialty tires -- e.g. for earthmoving and agricultural equipment, motorcycles and aircraft -, the distribution of tires and the publication of maps and travel guides.

Frankfurt am Main
Falk Frey
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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Moody's changes outlook on Michelin's Baa2 ratings to positive from stable
No Related Data.
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