DBRS Downgrades Chrysler LLC, Trend Now Negative

DBRS has today downgraded the ratings of Chrysler LLC (Chrysler or the Company), including the Issuer rating to CCC (high) from B. Additionally, based on DBRS’s Leveraged Finance Rating Methodology (see press release dated June 9, 2008 for details), DBRS has assigned recovery and instrument ratings to Chrysler’s First Lien Secured Credit Facility and Second Lien Secured Credit Facility of RR1/B (high) and RR5/CCC (previously rated B low) respectively. All trends are now Negative. The ratings action reflects the sharp downturn in the U.S. automotive industry, Chrysler’s core market, combined with the dramatic shift in vehicle segmentation toward smaller vehicles and away from SUVs and pick-up trucks, which represent the Company’s traditional product strengths. With this rating action, Chrysler is removed from Under Review with Negative Implications, where it was placed on June 20, 2008.

The Company’s business profile has been significantly undermined by the dramatic deterioration of the automotive industry in North America, where aggregate demand has dropped sharply, given the well-documented economic concerns in the United States. Light vehicle sales in this market are estimated to be in the range of 14.0 million units, which represents the lowest total in well over a decade. This has been exacerbated by the sharp rise in oil and fuel prices, which has resulted in a significant acceleration of the shift away from larger vehicles (such as SUVs and pickup trucks) and toward smaller vehicles (e.g., passenger cars and crossover utility vehicles (CUVs)). Chrysler has been materially adversely impacted by these market developments as it previously focused on the larger (and typically more profitable) vehicles and, as such, is currently under-represented in the smaller vehicles segment. While this under-representation currently affects each of the Detroit 3, DBRS notes that the relative overweighting of pick-up trucks and SUVs is slightly higher with Chrysler than with either of Ford Motor Company (Ford) or General Motors Corporation (GM). Accordingly, the Company’s unit sales through the first seven months of 2008 dropped 23%, relative to a total decline of 11% in the U.S. market; with Chrysler’s market share through this period dropping to 11.3% vis-à-vis a level of 13.1% through July 2007. (DBRS notes that some of the Company’s models that are classified as trucks (e.g., selected CUV and minivan models) have sold reasonably well, given respectable fuel economy measures and further observes that a portion of Chrysler’s lost sales is attributable to a deliberate reduction in fleet activities, particularly daily rental.)

Despite the drop in sales and market share performance below the Company’s expectations, DBRS acknowledges that, as of June 30, 2008, Chrysler remained in line with most of its budgeted parameters. This is a function of the ongoing cost-cutting efforts of the Company, combined with initial assumptions for 2008 that were considerably more conservative than in the case of Ford and GM. Furthermore, in reaction to the sharp change in U.S. market conditions, Chrysler is reducing its hourly and salaried workforce by approximately 26,000 workers. The Company is reducing its capacity as well, mostly in the truck/SUV/minivan segments. Additional production through global partnerships with various OEMs has also helped increase capacity utilization.

Notwithstanding the above, DBRS considers Chrysler to be the most exposed of the Detroit 3 to the challenging market conditions in the United States. In addition to its current product portfolio (discussed previously), DBRS notes that Chrysler’s announced future product pipeline is also very heavily skewed toward truck-based vehicles and, as such, is misaligned with the apparent change in sentiment of the U.S. market toward smaller vehicles. Moreover, due to funding constraints and high potential losses associated with the leasing of pick-up trucks and SUVs (given the alarming drop in residual values of these vehicles), Chrysler’s financial services affiliate, Chrysler Financial LLC (Chrysler Financial, a sister company in which Chrysler has no beneficial interest), recently announced its exit from leasing activities. As consumers are already burdened with reduced access to credit, DBRS notes that Chrysler Financial’s leasing exit could further erode demand in a very weak market. DBRS further notes that the overwhelming majority of the Company’s sales are sourced from North America. As such, unlike GM and Ford, Chrysler does not have the benefit of significant international operations to partially offset the sizeable losses incurred in its native market.

The Company’s liquidity would appear to be satisfactory for the short-term. As of June 30, 2008, Chrysler’s cash balance totaled $9.4 billion (excluding restricted cash). While this amount is relatively unchanged from the 2007 year-end level, DBRS notes that the June 2008 balance was augmented by working capital improvements as well as the expected $2 billion drawdown of term debt and Chrysler Group note. Chrysler’s debt maturity schedule is also favourable, with no significant near-term maturities. However, the Company’s liquidity going forward will likely be significantly undermined by sizeable cash outflows to fund operating losses that may increase substantially in the near term. While U.S. automotive sales are currently expected to reach approximately 14 million units in 2008, DBRS notes that the rate of sales the past few months has fallen precipitously, with the annual rate of sales recorded in July 2008 dropping below 13 million units. For 2009, the outlook is such that total unit sales are at best expected to be relatively flat with 2008 levels.

Absent a capital infusion from its parent company (CG, Investor, LLC, an affiliate of Cerberus Capital Management, L. P. (Cerberus)), Chrysler would appear to have few additional sources of liquidity. Most of the Company’s U.S. assets are already encumbered; similarly, any divestitures are unlikely to generate significant proceeds.

The ratings trend remains Negative. However, in light of today’s rating actions, future losses and associated cash outflows would have to be considerably below DBRS’s expectations to prompt a further downgrade. DBRS notes, however, that as of January 1, 2010, Chrysler’s prospects improve considerably as its revised labor agreement with the United Auto Workers (UAW) comes into effect, substantially improving the Company’s cost position. Furthermore, there may also be a significant level of pent-up demand for automotive vehicles by this timeframe in light of the depressed sales levels (i.e., well below secular trend) expected to persist for the remainder of 2008 and through 2009.

Note:
All figures are in U.S. dollars unless otherwise noted.